MSMEs and the Union Budget 2019-20
By Yerram Raju*
The time is ripe for expectations on a few counts: The first time Woman FM would be compassionate; since she combines in her portfolio the Corporate Affairs as well, the B2B can expect some reliefs for the micro and small manufacturing enterprises; fiscal reliefs will have a slant towards production and employment to push growth and would deal harshly the wilful defaulters both on tax and loan fronts.
Banks bit by huge corporate loan defaults started looking at MSMEs afresh as windows of opportunity although their attitude towards funding manufacturing enterprises still hangs on the unforeseen risks. This is so mainly because of the need for monitoring and supervision of these fledgling enterprises who will continually need mentoring, counselling and handholding and these involve manpower and related costs.
Post liberalization Banks have cut down costs on this count but at the same time charge for them in their books of accounts to ward off accountability. Banks can be legitimized to outsource such tasks at a small price from a few accredited institutions provided the banks do not charge their clients on this count. This is a non-budgetary intervention that the FM can make.
The cascading effect of large corporate defaulters on their vendors in the small sector and the banks’ unwillingness to buy this argument before applying their sledge hammer of SARFAESI Act action needs a novel treatment to the defaults arising therefrom.
The allowable leeway for corporates that June 7, 2019 circular of RBI could be extended to MSMEs in the following areas: firstly, the lenders should have a Board approved policy for Resolution Plan; second, they should conform to transparent timelines for implementing Resolution Plan; third, they shall require independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. Fourth, the cost of such independent credit evaluation should be borne by the lender and not the borrower.
Because of the large numbers requiring such effort, Union Ministry of MSMEs can accredit institutions like the Industrial Health Clinics wherever promoted by the State Governments and at least one more Accounting Firm that should pass the independent test of legitimacy with passion for the MSME sector.
Several units where power itself a major input like induction furnaces is, rubber, rolling mills, etc., the reforms in the power sector jacked up the price of this input by as much as 100% making them uncompetitive. Hence in the interest of the employment intensive manufacturing micro and small enterprises, the cost of power can be subsidized linked to GST as it will enable sharing the cost of subsidy equal with that of the state government.
Start-up manufacturing MSEs find it almost impossible to invest in land because of its prohibitive cost. Building rural industrial townships by the States with the required infrastructure like, safe drinking water, industrial water, electricity, packaging, testing and branding or co-branding facilities, multi-storied residential complexes for the workers on lease basis with industry participation, primary and upper primary schools, crèches, play grounds and cultural spaces would be the best alternative to boost this sector. Fiscal incentives like income tax exemption for a five-year period for investments in such infrastructure would be in order.
Hand looms and handicrafts cost the consumer high and leave little margins for the producers. Therefore, there is need for providing safe havens at both the ends to maintain production demand-driven. Present incentive system needs revisit to rationalize them.
Existing urban industrial estates should be up-scaled and modified to provide all the logistic facilities closer to the MSEs under PPP mode. It is important for India that has competing demands on land space to develop lease markets in a big way sooner than later to keep double digit growth moving sustainably.
Industrial work space should be made available on leasehold basis for 15-20 years with permission to mortgage leasehold rights in favour of lending institutions. The caveat should be that the lending institutions should be ordained to take recourse to this security only if it is sold to a frim of similar manufacturing facility and not for real estate or housing purposes.
To provide comfort to the micro and small enterprises in mainstreaming themselves into the economy, both ease of doing business and exit should be of greater comfort than now. Enterprises should be incentivized for vertical growth and all perverse incentives that led to spawning of enterprises horizontally should end. Lately, MoCA is seen to be over-regulating, making small and medium enterprises shun equity markets. There is need for extending regulatory reprieve for SMEs to access bourses.
IBC-like code for micro and small enterprises is imperative for providing easy exit route. Invariably apart from the debt overhang, sovereign dues pose severe problem for those that would like to exit the enterprise sector. Accommodative stance in this regard would be dis- allowing Banks to attach and to sell the only dwelling house of the entrepreneur under SARFAESI Act provisions.
If the enterprise has availed state incentives either while establishing or running the enterprise (like the interest rate pegged to 3 percent per annum in some states), such enterprises shall be eligible for exit route only after ensuring that they have not been diverted to building non- manufacturing assets: wherever capital subsidy has been availed by the unit, the State shall have the first right of recourse to such asset if the enterprise seeks winding up within five years of establishment.
In order that unorganised MSEs become organised and employment is truly reflected in the musters, even zero-based GST-applied manufacturing MSEs should be ordained to submit the GST returns quarterly. Firms that offer cloud-based but customised ERP solutions to the MSEs should be incentivised so that the MSEs embrace this accounting solution at least cost.
MSEs with turnover of up to Rs.10cr that engage accounting consultancy services should be provided fiscal incentive by way of income tax reduction. Tax compliance in the process will be incentivized.
Guarantees of CGTMSE did not provide the much-needed comfort as banks did not buy the scheme for enterprises drawing credit for more than Rs.10lakhs. MSEs look to the budget in terms of the banks sharing the guarantee premium on 50:50 basis with the MSEs or reduced premium for those buying the higher guarantee cover. Wherever the banks take collateral to hedge the uncovered guarantee risk, units should secure credit at lower rate of interest than otherwise.
The FM would do well to include in the budget tax incentives for strategic partners’ investments in the organisations meant for revival of the potentially viable units. This can be by way of exempting them from income tax for the first three years up to a limit of R.500lakh per unit. This will speed up restructuring of viable enterprises faster and in larger numbers.
MSEs particularly suffer from the absence of responsible and credible consulting services. Hence dedicated consulting firms with stakeholder participated – either promoted/partnered by the state governments or NBFCs through a separate Corpus Fund dedicated to the cause of MSEs should be qualified for GST exemption for five years, provided they work on low- yielding assets.
Government departments of both union and state governments should mandatorily become members of the Registered Trade Exchanges to deliver the advantages of e-commerce to the MSMEs and facilitate online payments of bills drawn on the former. It is pertinent to mention that so far trading has not moved significantly in this direction and most delayed payments are by the government departments and PSUs. MSE Facilitation Councils have inherent conflict of interests and the best would be to do away with them and the costs saved can move to incentivise e-commerce.
*The Author is an economist and Adviser, TIHCL, Government of Telangana. The views are personal. Can be reached at firstname.lastname@example.org