Indian MSME sector and its Expectations from the Union Budget 2022-23?

The MSME sector forms the foundation of the Indian dream of an Atmanirbhar Bharat. But, the Covid-19 pandemic and resultant disruptions affected MSMEs’ earnings by 20-50%. The greatest brunt was borne by the SMEs because of reduced demand and high liquidity crunch. Indian MSMEs have huge expectations from the upcoming budget 2022-23. Here is how the Union Budget 2022-23 for MSMEs can rev up their growth.

Union Finance Minister Nirmala Sitharaman will present the most anticipated Union Budget for 2022-2023 on 1st February 2021. Unlike last year, when the prime focal point of the budget was on the rural infrastructure and the healthcare system, this year, the budget will focus on strengthening the economy that decayed due to the unprecedented COVID-19 crises.

So, like other sectors, the Micro, Small and Medium Enterprises (MSME) sector is also optimistic about the Union Budget 2022-23. The wish list includes a simplified taxation framework, robust infrastructure, and raised investments from the government. Such initiatives are crucial for bolstering the performance of small and medium industries and India’s economic growth.

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Union Budget 2022-23 for MSMEs Must Build upon Existing Initiatives

The Indian Government has implemented exceptional schemes and plans in the past years for the MSME sector. Last year, the Atmanirbhar Bharat Scheme provided packages for small and medium industries. The MSME sector is expecting the finance minister to continue with the Atmanirbhar Bharat Scheme even this year. This is because the scheme has been a savior for the otherwise crippling MSME sector by galvanizing funds and employment. Secondly, the MSME sector is also wishing for the Government to broaden the spectrum of the Production Linked Incentive (PLI) scheme to cover engineered products.

Moreover, the Emergency Credit Line Guarantee Scheme has shown effective results in the past year. Under ECLGS,  around 10% loans went to the total small and medium enterprises, i.e., SME loans. Out of the total loans under the scheme, a whopping 90% part was small ticket-size loans. Moreover, the banking sector that is otherwise known for its conservative behavior while lending to MSMEs has also taken off quite well under this scheme. Around 90% loan disbursement was to sub one crore industries. But, the scheme has some bottleneck issues expected to be removed by Budget 2022-23. At present, the credit claim process under ECLGS is quite challenging especially due to delay in claims. According to a SBI report, the ECLGS saved 13.5 lakh MSME units from bankruptcy, 1.5 crore jobs and 14% outstanding loans from turning into Non performing Assets.

The MSME sector wants the Government to revive the Credit Linked Capital Subsidy Scheme that was discontinued after March 31, 2020. The scheme can aid in the technology up-gradation of small and medium enterprises. 

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Top Expectations of MSME Sector from Budget 2022-23

• A Strong Focus on Expanding the Access to Organized Credit

The MSME sector is still miles away from getting smooth access to organized credit due to low penetration of Indian Banks. Only a small fraction of small and medium industries in India has access to Indian banks and MSME loan schemes. As a result, the MSMEs in rural and remote areas resort to unorganized credit options ultimately ending in a debt trap. Along with lack of collateral and conservative banking policies, lack of financial knowledge about MSME loan options is another hurdle. So, the upcoming budget may set the foundation stone for a new banking policy for MSMEs to concentrate on the following domains:

1. a) Information and cash flow-based lending 
2. b) Disbursement of credit to small enterprises 

• Focus on improving working capital limits and access

In the backdrop of Make in India and the opening up of the economy after lockdowns, the MSMEs need access to adequate working capital more than ever. So, apart from increasing the working capital limit, MSMEs expect new instruments to enhance the working capital flow. Invoice discounting, POS financing, credit insurance, and factoring are a few solutions to enhance working capital with MSMEs. For enriching credit insurance access, NBFCs can play a crucial role to lessen the load on banks. Boosting access to working capital will help MSMEs with liquidity and debt repayments. It will also enable the small and medium enterprises to meet the fixed expenses like electricity, rent, salaries and statutory dues.

• The Union Budget 2022-23 for MSMEs should rationalize the GST regime

At present, highly inflated, non-uniform, and unpredictable prices of raw material are playing a spoilsport in MSMEs recovery curve. Besides, a large portion of working capital secured by the MSME sector is used for paying higher GST. The Indian MSMEs are watching out for the following reforms in the GST regime:

• Bring down the GST on manufacturing from 18% to 12% to promote the Make in India initiative. A reduction in GST rates will not only bring raw material prices to pre-Covid levels but also enable Indian MSMEs to compete locally and globally.    
• Easy compliance norms and unblocking of Input Tax Credit. ITC will further enable the MSME sector to invest back into the business. Thus, providing taxation benefits for small scale industries becomes imperative for ensuring a strong comeback. 
• Moreover, issuing system generated notices for discrepancies in availed ITC just for abnormal differences rather than minor differences can aid in decreasing additional difficulties. 
• In addition, the GST filing process needs to be made easier with an option for modification of the information in Form GSTR-3B in the period to which the transaction relates shall be beneficial. 
• Providing the choice to issue E-invoice voluntarily for companies with a turnover less than Rs 50 crore will enhance ease of doing business for organizations having several companies and using a common ERP system. 

• Ease of Doing Business for MSMEs

Due to the concerted efforts during the past few years, India’s rank at the World Bank’s Ease of doing business has marked a considerable upward shift. However, the streamlining of the system of approvals, rules, and frameworks will need a lot more effort. The MSME sector needs a single point of contact to decrease the logistic costs, delays, documentation complexities, and turnaround time. The budget needs to introduce a holistic strategy encompassing all the key indicators like starting a business, permits, property registration, credit availability, tax payment, trade across borders, and insolvency resolution. The upcoming Union Budget 2022-23 for MSMEs must bring concrete reforms to improve the ease of doing business for MSMEs.

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Will the MSME sector get what is expected from the Union Government?

After the strong support packages under the 2021-22 budget, the MSME sector is hoping for even better reforms. A dedicated trade policy to motivate MSMEs to explore international markets, an impetus to encourage digital transformation, the introduction of disruptive solutions, technology transfer programmes between MSME clusters and the scientific community are some of the highest bets from Indian MSMEs. Continuing with the previous patterns, MSMEs are also hopeful about an incoming stimulus to indigenous designs and manufacturing. Like last year, will Union Budget 2022-23 for the MSMEs sustain the appreciability this year? Will the Union Government fulfill the hopes of MSME sector? We will get our answers on the 1st of February 2022, by the Union Finance Minister Nirmala Sitharaman.