MSMES News: MSMEs are largely outside the scope of the PLI programme, many small businesses are excluded from the ECLGS. Can the 2022 budget provide a course correction?

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There’s no denying that the pandemic has dealt a huge blow to many small businesses over the past two years. Now Omicron threatens to further disrupt small businesses. Under these circumstances, the budget that Finance Minister Nirmala Sitharaman is due to present on February 1 is important for several reasons.

It gives SMEs a chance to reorient themselves in the face of new realities and expectations and also gives them the opportunity to ask the government for certain measures that can help them cope with the pandemic distress.

Almost all MSMEs want an increase in budgetary expenditure in the sector. According to the entrepreneurs, this is urgently needed to combat the growing business threats triggered by the pandemic that are destabilizing their supply chain. Notably, the government budget allocation for 2021-22 to MSMEs was Rs 15,700 crore compared to Rs 7,572 crore in 2020-21. But red tape and bureaucracy, according to the industry, prevent a significant portion of the benefits from reaching micro units, which constitute 99% of all MSMEs.

Industry observers also point to the need for specific devices. They say financial institutions still don’t treat them fairly and the budget should fix that.

Rajiv Chawla, chairman of India’s industry body IamSME, said a key demand this time is the removal of prepayment and foreclosure penalties on loans to MSMEs. The government’s flagship Production Linked Incentive (PLI) program is now restricted to large investors. The government should introduce a similar incentive scheme for SMEs, Chawla adds.

The segment cannot be overlooked as it is a growth engine of the Indian economy. It holds immense importance among the industrial sectors of India; employs 40% of the country’s active population; contributes 30% of the GDP and is responsible for 50% of the country’s exports. In addition, it has many informal actors. The country’s MSME base is also the largest after China.

The Federation of Indian Micro, Small and Medium Enterprises (FISME) says there must be specific measures for MSMEs affected by Covid. The industry body believes that the pandemic has had a negative impact on SMEs and that many accounts have become non-performing assets (NPA), even with an extended NPA classification from 90 days to 180 days. As the guarantee and guarantee generally remain in full use in MSMEs, the inability of the promoter to provide additional guarantee during restructuring becomes a serious handicap. For units affected during the Covid pandemic, FISME suggests, the government can extend 100% warranty coverage for the extra security needed for restructuring.

It also indicates that while measures such as the Emergency Credit Line Guarantee Scheme (ECLGS) have helped many MSMEs, several of them have remained outside the support system. Indeed, decision-making in banks has become based on Excel sheets or on parameters, says Animesh Saxena, president of FISME. Therefore, branch managers must be empowered to decide on restructuring proposals giving them the flexibility to go beyond benchmarks. Such relaxation is necessary where there is a deviation from standard benchmarks on days of inventory, days of debtor and margin requirements, among others.

According to FISME, international banking regulations issued by the Basel Committee on Banking Supervision have put SMEs to the test. Small businesses are also at a loss because banks insist on ratings from rating agencies. Saxena says this increases the cost and duration of loans.

FISME calls for pre-pandemic scoring guidelines to be suspended for at least three years. While the Reserve Bank of India has said BLR rating standards are not mandatory for accounts with an exposure of up to Rs 7.5 crore, banks are still insisting on them, the entrepreneurs claim.

To protect the interests of supplier MSMEs under the Insolvency and Bankruptcy Code (IBC), FISME proposes that MSMEs be classified into separate sub-categories within the category of operational creditors and be granted priority for the payment of their contributions in relation to the due of other operational creditors and other debtors. . In addition, MSME contributions should be matched to those of blue collar workers to a minimum extent of 5% of the total amount of the company’s insolvency resolution process or liquidation amount, as the case may be, for payment , says Saxena.

The industry body also says mandatory GST registration has prevented millions of women and artisans from selling through e-commerce. “There are good reasons for allowing small businesses to sell without GST registration below a turnover of Rs 40 lakh in physical stores. This facility is not available once the business sells goods online through e-commerce. The inability to manage GST compliance costs has prevented millions of self-employed/SHGs and artisans from selling their products online, especially during the Covid pandemic. Offline and online sellers should be allowed to sell without GST registration below the prescribed threshold,” says Saxena.

FISME also claims that “medium businesses” are under siege in India. “Unfortunately, we’ve created a whole perverse incentive system that punishes any unit trying to go from small to medium.” That has to change with this budget, says Saxena. “Medium-sized enterprises are excluded from the 25% reserved for micro and small enterprises (MSEs) under the government’s public procurement policy. But at least they should be allowed to take advantage where no micro or small unit is bidding,” he says. “Medium businesses should be allowed to access facilitation board support under the MSMED Act. Banks exclude medium-sized enterprises from their code of banking commitment to micro and small enterprises and although MSEs cannot be sanctioned when they cancel loans, medium-sized enterprises are penalized. The code should apply to the entire MSME sector,” he adds.

Pradeep Multani, President of PHDCCI, proposes an extension of the ECLGS timeline for another year, until March 31, 2023. The chamber also wants the extension of the reduced performance bond rate to 3% for an additional year until December 31, 2023. 2022. “We appreciate the corporate tax reduction from the top rate of over 30% to an effective rate of around 25%. However, we suggest a tax reduction for MSMEs working as sole proprietorships and partnerships. For these companies, the maximum tax slab should be reduced to 25%. For new units, the effective rate is approximately 17%, so we suggest that to allow entities to benefit from Section 115BAB, the time allowed to begin manufacturing with a new unit may be extended by at least one period. 24 months — the new unit will be cleared to begin manufacturing by March 31, 2025,” says Multani.

The government has spent significant resources to attract big business through PLI programs spread across all sectors, says Rakesh Nangia, Chairman of Nangia Andersen India. MSMEs, however, have been largely excluded from the scope of these programs. “Given the large-scale growth and employment challenges we foresee, it would be prudent for the government to incentivize MSMEs to scale up their operations. Some measures would be to ensure that the PLI schemes due to be announced in this financial year have a separate exclusion for MSMEs to allow the benefits of these schemes to reach all businesses and not just the privileged few,” says Nangia.

The Industry Promotion and Domestic Trade Department has been working on preparing a one-stop portal for incorporation and obtaining all necessary approvals. According to the department, 19 central government ministries/departments and 10 states have joined the national one-stop-shop system, which has now been smoothly launched as a one-stop authorization point for investor-related matters. Nangia adds that the portal is expected to go live soon and if state-level registrations and renewals are also included on the same portal, it could be a game-changer bringing real ease of doing business.

(Editing by Ram Mohan)

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