The 2021 Budget measures to strengthen debt resolution mechanisms and the balance sheets of financial institutions are likely to lead to a smoother flow of credit to the Micro, Medium and Small Enterprises (MSMEs) in India.
The proposal to strengthen the National Company Law Tribunal (NCLT) framework, implementation of e-Courts system, and introduction of alternate methods of debt resolution and special framework for MSMEs will help the stressed sector that suffered the most during the lockdown. Experts foresee that rationalisation of customs duty is expected to provide a level playing field for domestic MSMEs and help them progress.
“Revision in definition of small companies and easing of regulatory compliance will promote ease of doing business. The revision in definition of small companies by increasing the threshold of paid-up capital to Rs 20 million from Rs 5 million and threshold of turnover to Rs 200 mn from ₹20 million and increase in tax audit limit for businesses that carry out 95 percent of their transactions digitally to Rs 100 million from Rs 50 million will help,” said Dr. Arun Singh, Global Chief Economist, Dun and Bradstreet.
This expert further feels that calibrated customs duty rates on chemicals to encourage domestics value addition and to remove inversion and rationalising exemption on import of duty-free items as an incentive to exporters of garments, leather, and handicraft items will help the MSMES as almost all these items are manufactured by domestic MSMEs.
The MSMEs generally depend upon big businesses in the supply chain and the overall buoyancy in the economy for those that deal with retail. Though the budget has taken care of changes in duties, easier compliances to provide support to the MSMEs challenges still remain for the segment. The MSME segment employs nearly 11 crore people in the country that is close to 40 percent of India’s non-farm workforce. However, the majority of MSMEs are stuck in a vicious cycle of informality, low productivity, and sub scale. One of the major challenges that MSMEs face is lack of adequate working capital. This is further coupled with the high regulatory cholesterol in the sector.
“A manufacturing MSME with a single state operation deals with as many as 70 licenses and permissions to get off the ground. It can take several months before construction of the plant can begin. On an ongoing basis, such a company deals with at least 400 compliances in a year with 144 returns and intimations, 103 payments and 62 registers. At least 192 compliances are from Labour Compliances. This establishment can be inspected by at least 20 different inspectors in a year. They spend approximately Rs 1 lakh per month to manage the compliance burden. All of this adds pressure to their working capital. On the taxation front as well, there are multiple issues that MSMEs deal with especially on GST,” remarked Rishi Agrawal, Founder and CEO, Avantis Regtech a TeamLease Group Company.
This expert feels that for the sector to grow further we should work to create an access to easy credit, enhance digital adoption, cut down tax rates especially GST and deregulate the ecosystem.
There are about 6.33 crore MSMEs in the country today. While these numbers are expected to rise rapidly by FY26, the sector at present is struggling.
“The MSME sector struggles with access to working capital. In fact, for credit MSMEs have to depend on other lenders as they often fall out of the gamut of the formal banking system (because MSMEs usually don’t have to maintain standard financial records), they end up borrowing on steep interest rates and they sometimes end up paying double the amount that they borrowed. MSMEs also face issues with accessibility to the markets. On the other hand, while they employee close to 11 crore people, the workforce is not completely skilled. Many MSMEs face productivity challenges too. One of the aspects which have helped MSMEs to grow is working closely with social commerce, e-commerce, and e-retail firms,” Vineet Rao, Founder and CEO, DealShare.
