Saturday, January 28, 2017

Budget 2017 for MSMEs

MSMEs and the Union Budget 2017

This is the time of expectations amidst the gloom of demonetisation. MSMEs hit worst in post demonetisation are looking eagerly to the FM for careful crafting of fiscal policy to boost the morale of MSMEs, particularly those in the manufacturing sector.

Banks have almost shut their doors to the manufacturing micro and small enterprises by biting their teeth strong through the recently amended SAFRAESI Act provisions. Their courage melts in the case of corporate defaulters. Large corporate defaulters cast a shadow of default on their vendors in the small sector and the banks are unwilling to buy this argument though the NPAs in the small industry segment is not significant compared to their elder brothers.


Several units where power itself is a major input like induction furnaces, 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.

Start-up MSMEs 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.

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. 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.

GST is eagerly looked to by several MSEs to offer comfort. However, with the delayed truce between the States and Centre, these enterprises can hope to gain the advantage of tax reforms only towards the end of the financial year 2017-18. This scenario calls for fiscal relief during the current budget.
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. After PJMY targets, banks virtually shunned manufacturing MSEs for lending. When Banks have no track record of extending the guarantee cover for units with Rs.100lakh credit limit, PM’s announcement on the 30th December 2017 that the limit will be increased to Rs.200lakh did not add any comfort. This is another area where the 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 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.100lakh per unit. This will speed up restructuring of viable enterprises faster and in larger numbers.
MSEs in particular suffer from 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 service tax exemption for five years, provided they work on no-profit, no-loss self-perpetuating and self-earning basis.

Finance Minister may also consider announcing disqualification of only dwelling house of a micro or small enterprise taken as collateral security for being placed under Sarfaesi Act proceedings, if such loans qualify for being granted mandatorily with CGTMSE guarantee. This becomes necessary because the banks have been overenthusiastic in recovering such collateralised small loans deviating from regulatory norms. One more amendment to Sarfaesi Act will help the growth of MSEs substantially.


Government departments of both union and state governments should mandatorily become members of the Registered Trade Exchanges to deliver the advantages of e-sale 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. Even the MSE Facilitation Council arbitration decisions are not honoured both by them and the Courts of judicature. This needs correction to the MSMED Act 2006, the FM may like to announce.