In one sentence, the largesse to the MSME sector in the Budget 2025 can be described as follows:

MSMEs approached the government with a long list of justified demands in the Economic Survey. The government announced MSMEs as the second most prioritised area, but the final package announced can be seen as either a half-full or half-empty glass, depending on one's perception.

Withdrawing the draconian SMA rating was a prime demand of the entire MSME sector, however, the FM, in her speech, did not withdraw it but instead provided for a guarantee fund to support MSMEs in distress under SMA ratings. We hope this scheme will be as successful as the guarantee fund for Covid-distressed MSMEs (CGSLE). But what were the reasons for retaining the SMA framework? The question remains.

Another widespread distress in the sector was the stranglehold of the credit rating agencies (CRAs). Under the existing RBI direction, all MSME loans above Rs 5 Cr. were to be rated for credit risk. While the RBI instructed that the necessary competency be developed in-house by the lending banks, and until then, the banks may take ratings from external CRAs, banks are taking the easy route by getting the credit ratings done by the CRAs.

The result is disastrous, as the CRAs neither have the competency nor the inclination to delve deeply into the ecosystem of MSME finance. The FM has announced that banks must develop in-house competency for credit ratings of MSME loans. Whether this forbids the use of CRAs will be known from the detailed notification; otherwise, it will be a damp squib.

The FM also announced a new guarantee scheme to finance, collateral-free, plant and machinery procurement by MSMEs up to Rs 100 Cr. With the demise of the State Finance Corporations (SFCs), project finance is always a challenge for MSMEs, particularly for new entrepreneurs. Banks are never comfortable funding without a guarantee or collateral, which a new entrepreneur, or even an existing one, cannot fully provide to the bank for financing a new or expansion project. We hope the new scheme will go a long way in financing new projects, thus creating new employment by MSMEs.

A production-linked incentive (PLI) scheme for MSMEs was a persistent demand from MSMEs, as the existing, much-hyped PLI scheme is restricted to large enterprises by its guidelines. This wish remained unfulfilled, but the employment incentive of Rs 15,000 announced in the Budget, along with subsidisation of EPF contributions for new employment, will facilitate the formalisation of the sector, with MSMEs reporting actual employment figures and providing a safety net to workers.

Widening the scope of the TreDS scheme for discounting bills of MSMEs by lowering the floor limit of compulsory registration on the TreDS portals to Rs 250 Cr from Rs 500 Cr, as announced in the budget, will bring more buyers of MSMEs under the purview of TreDS.

Coming to the brass tacks, despite all the announcements, the budget allocation for the Ministry of MSMEs has remained at the same level as last year, at around Rs 32k Cr. No allocation has been made in the Ministry’s budget for the two new guarantee schemes announced.

It is expected that necessary allocations for these two crucial schemes will be made in due course. The continuation of allocation for the Covid-affected enterprises' guarantee scheme (GECL) may ensure the approval of the pending cases. But does the budget allocation justify the lofty announcements made for the MSMEs?

Disclaimer: The writer is a retired industrial advisor to Government of India. Views are personal.