MSMEs and the budget: Towards global competitiveness in factor conditions, and market connect

The budgetary thrust on the MSME sector has laid emphasis on enhancing competitiveness of factor conditions such as credit, inputs, infrastructure, as well as market access. In a related context, apt skilling of manpower has also been emphasised upon. Notably, policy instruments have been integrated to foster development of integrated National Value Chains and encourage “Make in India”, albeit with progressive “greening of the sector”. In this context, the budget reflects the focus on developing competitiveness of the typically employment intensive MSME sector. In this budget, about INR 47000 Crore or 0.47 Lakh Crore has been allocated towards Commerce and Industry.

This is more than twice the allocation of INR 20,000 Crore in 2019-20. Let us consider each of the specific initiatives:

Increased access to credit for all scalar typologies: The budget envisions establishment of a Credit Guarantee Trust also for medium-sized enterprises, for the first time in the country. This is to provide collateral and third-party guarantee-free loans upto INR 100 Crore for manufacturing enterprises, particularly in the medium-scale sector. Alongside, for the smaller and micro-sized firms a new credit assessment model is to be adopted by nationalized banks based on digital footprint, than on conventional parameters related to asset and turnover. Similarly, for typically micro-sized and cottage enterprises, the limit under the Mudra Loan Scheme has been enhanced from INR 10 Lakh to INR 20 Lakh. Along similar vein, to address the issue of delayed payments to vendors by larger public as well as private sector firms, the long-demanded reduction in turnover criteria for compulsory participation by private firms has been conceded. The turnover threshold in this case has been reduced to INR 250 Crore from INR 500 Crore. Arguably, the initiatives are in sync with the landscape wherein 97% of the 6.3 Crore odd MSMEs in the country are micro-sized. In addition, credit support is to be offered to MSMEs undergoing stress, that is, Special Mention Accounts (SMAs) supported through a government guaranteed fund to help them avoid turning into NPAs. Furthermore, SIDBI is to open branches in clusters and also focus on direct lending to MSMEs. Notably, these initiatives are in sync with field-level initiatives at the state level where onboarding onto the TReDS platform and state level Credit Guarantee Funds are being evolved by a dedicated SIDBI PMU across states, and GT Bharat has been contributing as the PMU.

Industrial and social infrastructure: Industrial parks are to be established in 100 cities along with state governments or in PPP mode. Twelve IPs are to be established in National Corridors. Importantly, rental housing is to be established with dormitory facilities for industrial workers. Private investment, as well as state government led investments need complement this drive. Where should the investments go? India’s FDI inflows stood at about USD 45 Billion in 2023, largely flowing into Maharashtra, Karnataka, Gujarat, Delhi and Tamil Nadu and into sectors like auto-parts, IT, food processing, pharma and textiles. This is in sync with the sub-sector share in GDP with auto- parts, automobiles, textiles and pharma being important contributors along with chemicals and construction sub- sectors. Hopefully, over implementation of the initiative, the new industrial and social infrastructure target locations will accord deserved priority to these sub-sectors and related clusters.

Quality and global demand: E Commerce and export hubs are to be established in PPP mode. Notably, 50 multi- product food irradiation and safety units are to be developed in PPP mode. This is an important initiative. In 2023, Indian exports stood at USD 766 Billion with key export destinations including the USA, UAE, China, Bangladesh, Hong Kong, Singapore, UK, The Netherlands and Germany. Sadly, however, in many value chains including in agri- business value chains the country’s share in world exports is low. This initiative is therefore most welcome and will gel with the ongoing field-level interventions at the state level under the World Bank assisted MSME RAMP programme. Significantly, and very rightly the focus is on PPPs for implementation.

Skilling and promotion of labour intensive manufacturing: The budget proposes an incentive to both employers and employees with respect to their EPFO contribution. Also, support to employees is to be provided to the tune of INR 3000 per month for 2 years towards their EPFO contribution for each additional employee. In addition, one- month wage is to be provided to first time employees as a DBT. These initiatives also, but highlight, the recognition of the MSME sector in providing jobs and will also address concerns in the “job-less” growth argument. The sector is estimated to provide gainful employment to about 11 crore individuals and is the largest such sector in the globe.

Green Energy: An investment grade energy audit with financial support to traditional MSEs in 60 clusters, including brass and ceramics is to be facilitated. This is to help them shift to cleaner energy and energy efficient operations.

SIDBI has been leading related interventions complemented with credit investments. Extensive field level interventions are on-going supported by global development partners and under the RAMP programme at the state level propelled by the MoMSME.

Phased protection to develop National Value Chains: Other related policy initiatives include protective tariffs to foster domestic production of components related to solar technology systems, for example. Protective tariffs could also attract market-seeking FDI and hence facilitate necessary technology, knowledge and investment transfer. Illustratively, some trade policy interventions include:

Select commodities and Import Tariff Rates

Trade policy to encourage domestic value addition: Domestic value addition is a mandate that has received continuous thrust. For instance, the export duty in leather and leather product value chains has been largely maintained.

Select commodities and Export Duties

Initiatives to develop India into a global re-processing hub: The time period for duty free import of goods (other than these under export promotion schemes) exported after value addition from India has been extended from 3 to5 years. Till recently, articles of foreign exchange may be imported for value addition and export within 6 months, extendable upto one year. Aircraft and vessels for maintenance, repair and overhead enjoy a further additional period of one year.

Reduced duties on inputs to optimise procurement costs: The preceeding budget had reduced tariffs on inputs for leather and textile value chain stakeholders. The present budget initiated the same for the fishery sub-sector or value chain, wherein import tariffs on inputs for manufacture of prawn or shrimps or fish feed (including minerals/vitamin for pre-mixes, crude fish oils etc.) have been removed. Notably, India’s seafood exports peaked at INR 60,000 Crore last year meriting dedicated support for this sub-sector with potential. Furthermore, minerals such as Lithium, Copper, Cobalt and rare earth elements critical for nuclear energy, renewable energy, space, defence, telecom and high-tech electronics have been exempted from customs tariff. This is in line with the thinking that India has the scope to realise Competitive Advantage at the global level in these sectors.

In Summary: The budget displays the wisdom of the government in terms of specifically targeting critical factor and demand conditions, as well as specific potential value chains such as pharmaceuticals, semi-conductors, solar energy systems etc. Developing a conducive ecosystem for MSME value chains is a focus, along with initiatives to facilitate Ease of Doing Business (EODB) with states to be incentivised for implementation of their Business Reforms Action Plans and digitalization. The dynamic new government is on the right path towards helping evolve Viksit Bharat by 2047 propelled by a manpower-intensive MSME sector.

This article first appeared in ET Edge on 07 August 2024.