By Ashish Nayyar
Credit and finance for MSMEs: This year’s budget needs to tackle a markedly different set of challenges than 2022 – inflationary pressures, geopolitical disruptions (Ukraine war), and the looming threat of a recession in major western economies. These broader headwinds be as they may, the focus in India is shifting to growth from recovery – growth that will play an instrumental role in helping mitigate some of these headwinds. In particular, we expect the 2023 budget to continue accelerating growth for small and medium businesses, which are the true growth engines of the Indian economy. The micro, small and medium enterprises (MSMEs) segment makes up roughly 33 per cent of India’s GDP generating over 120 million jobs. But more importantly, they are a primary contributor to creating wealth at the grassroots level.
Financial and digital inclusion has been given increased priority by the government over the last few years. In this light, we expect a more supportive policy environment in the budget for the fintech industry which has showcased tremendous growth and is poised to hit Rs 16.3 lakh crore in market size by 2025, and particularly its ability to provide efficient financing to India’s transformative MSME sector. The MSME loan market has grown by around 18 per cent from 2021 to 2022 and by 4 per cent in the first quarter of 2022 alone to Rs 35.4 lakh crore. However, there still exists a funding gap of Rs 32.6 lakh crore in this segment and the government through policy intervention can help improve credit availability for smaller businesses by encouraging fintechs.
Obtaining an easy line of credit is one of the biggest obstacles that Indian MSMEs face due to their unstable and often unpredictable working capital cycles. We expect the 2023 Budget to bring about a much-needed policy and incentive-driven expansion in credit, given the improvements in the balance sheet and credit discipline shown by Indian banks in the past financial year. Government policies, specifically around infrastructure building, can also help untangle supply chains for these companies which would in turn facilitate timely payments and greater capital being financed. Transformative policies that promote buying or doing business with MSMEs can infuse large corporate capital into this sector, thereby bringing about a pivot from the current trend of the government helping MSMEs to the Indian industry itself supporting the MSME sector.
The government could also consider improving the scope of the Production Linked Incentive (PLI) scheme, which is currently limited to corporates and large companies in specified sectors, to cover more economic sectors and manufacturing MSMEs to boost exports. Further, acceptance of the industry body PHD Chamber of Commerce and Industry’s recommendation to change the current 90-day limit to convert MSME dues to NPAs to 180 days would send an encouraging message.
The Emergency Credit Line Guarantee Scheme (ECLGS) had a huge positive impact on credit growth to MSMEs with sanctions under the scheme aggregating to Rs 3.67 lakh crore till August 2022, with the scheme valid till March 2023. Extension to the ECLGS timelines, simplification of the release of claims guaranteed by the government under the scheme, and relaxation in the ceiling rates would be a welcome stimulus. As interest rates rise, we also expect Budget 2023 to restore interest equalization benefit of 5 per cent from 3 per cent to manufacturing MSMEs and 3 per cent from 2 per cent to all 410 tariff lines.
Also read: Budget 2023: Fixing MSMEs’ delayed payments, credit, GST related issues must, say experts
Another expectation from the budget is to create a favourable regulatory and policy ecosystem that accelerates workforce availability for MSMEs. The need of the hour is to make these companies an attractive alternative for the skilled workforce to join larger corporates. Direct tax benefits or a change in the ESOP structuring for smaller companies – which currently imposes a financial burden on employees – would help MSMEs attract quality talent, reduce attrition, scale operations, and maintain growth.
We also welcome the continued focus on green financing and India’s commitment to be Net Zero by 2070. Steering India towards a zero-emission green future is a gateway to creating successful sustainable businesses. We are excited about the 2023 Budget and the MSME/fintech supportive policies we hope it will herald.
After a rocky two years, the economy has finally stabilized and the timely budgetary initiatives that the government makes this year will strongly influence the business outlook. There is a huge potential for an upsurge in economic growth in 2023 and we believe in the government to take the right steps in catalyzing it.
Ashish Nayyar is the Co-Head, India at OakNorth. Views expressed are the author’s own.
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