Monday, July 14, 2014

SMEs in Union Budget 2014-15 – Implementation Challenges

This path-breaking Union Budget providing discontinuing continuity on several fronts has concretized all the promises in the BJP manifesto unfolding the vision of the Modi Government. Its allocations reflect pragmatism in that some projects got funds for Detailed Project Reports while others of long term nature that can only make a beginning got symbolic outlays.

Manufacturing sector that is just showing signs of revival with its growth rate touching 4.7% in May 2014 reversing the negative trend of growth till the end of March 2014 got a shot in the arm. Of particular relevance is the attention paid to the MSME sector.

This highly heterogeneous MSME sector in terms of the size of the enterprises, location, variety of products and services, people employed, coverage of social sector, and leveraging information, communication and technology (ICT) in running their enterprises holds nearly 3olakh units employ around 500lakh persons. 98 percent of them are in micro and small categories going by the definition of the MSME Development Act 2006. They have always reflected growth rates ranging from 8 to 11 percent far higher than their elder cousins. While INR 10crore investment in large enterprise provides one job or less, INR one crore in MSMEs provide on average 4 persons. They are also providing on-the-job skills and tolerate attrition rates multiple times the large enterprises while contributing to 40 percent of exports in manufacturing sector.
Most of them are in debt markets and are unable to access equity despite the SME Exchange in position.

The three key issues facing the sector; lack of finance, need for support for technology /skills and innovation and need for exit option get due attention. While the schemes are well intentioned, the implementation at the State level will be critical and would require State Governments to overhaul their machinery to take full benefits from these measures. Succinctly put, Arun Jaitly announced the following for the MSMEs:
1. Fund of Funds with a corpus of INR 10,000crore for providing equity through venture capital funds, quasi-equity, soft loans and other risk capital will facilitate startup companies.

2. Initial sum of INR 100crore for “Startup Village Entrepreneurship Programme” for encouraging rural youth to take up local entrepreneurship programmes. Read with the support for producer companies, this is a big shot in the arm.

3. Corpus of INR 200crore to be set up to establish Technology Centre Network. Successful execution of all these promises will give a significant boost for entrepreneurs and SME’s and facilitate the promotion and development and enhancing the economic growth of the country.

4. Promised to develop an entrepreneur-friendly legal bankruptcy framework for SMEs that will enable easy exit.

5. To incentivize small entrepreneurs in the manufacturing sector, the government has also proposed to provide investment allowance at the rate of 15 percent to a manufacturing company that invests more than INR 25crores in any year in new plant and machinery for investments up to 2016-17.

6. Definition of SMEs would be modified.

7. A nationwide “District level Incubation and Accelerator Programme” to be taken up for incubation of new ideas and necessary support for accelerating entrepreneurship.

However, once an entrepreneur sets up a unit in the sector, it is well nigh impossible for him/her to exit under the existing rules. The MSME Development Act 2006 has not been able to create a window for safe exit. It is this context that makes the announcement on exit policy and bankruptcy law greet with lot of enthusiasm. This measure will eventually distance them from the endemic sickness.

Some of these proposals like MSME tool rooms and innovation centres that are already present in most large cities unless implemented enterprise friendly, would bring wrinkles on the already sweating brow. Similarly entrepreneurship development programmes conducted by all State Governments and EDIs and MSME DIs, are not able to generate proposals/projects that are bankable. Finance still holds the key.

However, MSME sector faces all its problems at the State and sub-State levels where actual implementation mechanism rests. The District Industries Centers save exceptions like Tamil Nadu and to some degree in Karnataka, Gujarat and Maharashtra, are a window of harassment and the single window scheme for securing all clearances have multiple doors and windows. The archaic DICs have to be converted into District Facilitation Centers in the first place if good governance has to touch this recognized distressed sector.

The other implementation block is delayed release of announced subsidies both from the Central and State Governments. Third, State Government machinery needs to be trained for the magnitude of work expected from them and also their knowledge levels/ familiarity with technology, bankability of schemes etc has to significantly improve. Here, the ministry of MSME can play an important role to ensure that the State Governments are ready to implement budget proposals.

RBI in its guidelines provided for collateral free credit to these MSMEs up to Rs.10lakhs although the Credit Guarantee Fund Trust for MSEs provided for such access up to Rs.100lakhs. It is a different issue that banks follow neither save very few exceptions going by less than lakh of lucky MSEs securing collateral free credit.

RBI has also advised the Banks to display the facilities available to the MSME sector including the guarantee thresholds in the banking hall and there is clear breach on this count with no regulatory action. There is no mandatory percentage of priority sector credit to flow to this sector. The credit issues and rules and regulations are expected to be examined by a Committee and the three month speedy delivery of its Report would hopefully be followed up with equally speed implementation mechanisms. Budget certainly made the MSMEs smile this time as environment for enhancing their competitiveness improves significantly.