Budget 2019: Why MSME sector must be priority for Modi government

Updated: Jul 04, 2019 11:23 AM

Union Budget 2019: MSMEs registered annual growth rate of 4.35% during 2006-15 (from 3.618 crore in 2006-07 to 5.105 crore in 2014-15).

Budget 2019, Union budget 2019, budget 2019 india, MSME sector, employment, GDPUnion Budget 2019: There are 6.34 crore units contributing around 24% to the services GDP.

By Pravakar Sahoo & Ashwani Bishnoi

Budget 2019: The MSME sector contributes 30% to GDP; India is aiming to increase this share to 50% of GDP. MSMEs are vital in generating employment, output and exports, as this sector contributes one-third to India’s manufacturing output and 45% to exports. According to a recent CII survey, MSMEs are the second-largest employment generator after agriculture, by engaging 12 crore persons. There are 6.34 crore units contributing around 24% to the services GDP. However, the sector has been facing a number of challenges—from accessing credit to marketing—and more so after demonetisation and GST. In this context, the RBI report headed by former SEBI chairman UK Sinha is timely and comes up with recommendations that are necessary and implementable.

MSMEs registered annual growth rate of 4.35% during 2006-15 (from 3.618 crore in 2006-07 to 5.105 crore in 2014-15). During September 2015 to July 2018, 48.4 lakh MSME units were registered on the Udyog Aadhaar Memorandum (UAM) portal. The sector has advantages in realisation of inclusive growth agenda of India as one-fifth of MSMEs are residing in rural areas. Besides, the start-up community is growing rapidly—India is now the third-biggest start-up hub in the world—and providing a platform to MSMEs to access a larger market base. Today, India has around 7,200 start-ups, including 1,200 start-ups that came up in 2018 only. They have created 40,000 new direct jobs and are robust in accessing finance as these start-ups saw a 108% growth in total funding during 2017-18. City-based start-ups connect local SMEs and in many ways address the problems of MSMEs relating to product standardisation and market access.

Although MSMEs are the backbone of the economy, they suffer from access to finance, apart from low scale, technology, branding, competition, etc. At aggregate level, credit growth plunged in the recent years, reaching 5.1% in FY17, the lowest in last six decades. Moreover, bank credit remains skewed towards large enterprises as only around one-fourth of bank credit (Rs 14.8 lakh crore, of the total Rs 62.3 lakh crore) goes to the MSME sector. This highlights the potential of the MSME sector as it receives one-fifth of bank credit but contributes one-third of manufacturing output with large employment opportunities. As per a CIBIL report, mid and large corporate segment held the biggest share of the overall credit at about 43%, with an exposure of Rs 47.5 lakh crore. The contribution of public sector banks in the MSME sector lending has declined by 19% during 2013-18, and touched around 40%, implying that MSMEs have to explore other avenues for meeting their credit requirements. Moreover, ‘new to credit’ (NTC) borrowers entering the formal credit sector have accelerated from approximately 2.7 lakh in the first half of 2016 to 5.2 lakh in the first half of 2018. This indicates the rising pressure to enhance the lending environment for MSMEs. The sector also experienced an increase in NPAs—from 7.3% to 9% during 2013-18.

In this context, the recommendations of the RBI committee to create a Rs 5,000 crore corpus, the Distressed Asset Fund (DAF), to assist MSME units in clusters where a change in the external environment led to a large number of MSMEs becoming NPA are important. Also, recommendations to move towards cash flow-based lending and revising collateral-free loan limit from Rs 10 lakh to Rs 20 lakh are useful. To reduce the credit gap, a new intermediary, i.e. loan service provider (LSP)—an agent of the borrowers—is a welcome proposal. Most of the cluster development initiatives are funded by public sector agencies. Private sector contribution should be enhanced through debt instruments like bonds, CDs, etc, with tax incentives through SIDBI. The committee also recommends strengthening of the MSME Export Promotion Council and a national (and state-level) council as a special purpose vehicle for crowd funding of MSMEs. A government-sponsored Fund of Funds (FoF) to support VC/PE firms to invest in the MSME sector should be in place. Considering their vulnerability and size, Insolvency Code/delegated legislation should provide out-of-court assistance to MSMEs that are mainly proprietorships, such as mediation, debt counselling, financial education, etc. The government should provide insurance coverage to MSME employees such as coverage under Ayushman Bharat-PMJAY to cope with natural calamities. All these proposals, which are doable, will strengthen the financial position of MSMEs.

Some recommendations to improve accountability, transparency and efficiency in lending and its uses are (1) online due diligence and appraisals of MSME loan proposals by banks using data available from sources, including GSTN, Income Tax, Credit Bureaus, Fraud Registry, etc, and (2) bringing all credit guarantee schemes under the purview of regulation and supervision of RBI.

RBI has some recommendations for more efficient functioning of MSMEs. These include moving away from investment volume to a turnover-based definition, 25% mandatory procurement by PSUs from MSMEs, and creating a unique enterprise identifier (UEI) for procurement, availing benefits, etc. Currently, MSMEs have to do multiple registrations with many entities such as Udyog Aadhaar portal, GSTN, NSIC, etc. Successful Indian start-ups within the country and those that are moving outside due to enabling environment, encompassing tax concessions, well-developed infrastructure, ease of doing business, exit policy, etc, should be retained with suitable financial and non-financial incentives.

The government should also facilitate collaboration between MSME clusters and companies/universities offering innovation infrastructure, R&D institutions, etc, in a specific industry or knowledge area. This is because MSME clusters are not properly equipped in areas such as tool rooms, innovation centres, testing facility, etc. The recommendation to build networks of service providers to offer expertise to MSMEs by giving them customised solutions in areas such as technology, product development and marketing techniques will create an enabling environment for MSMEs.

We can get back to 8% growth and create enough jobs if we strengthen our MSME sector. The RBI report on MSMEs is timely and the Union Budget should focus on its recommendations.

(The Authors are professor and assistant professor at Institute of Economic Growth, Delhi, and National Institute of Technology, Haryana, respectively)

Do you know What is Finance Bill, Short Term Capital Gains Tax, Fiscal Policy in India, Section 80C of Income Tax Act 1961, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Budget 2021: FY22 Budget exercise from October 16