Disappointing Union Budget 2023

 

Bluster Budget

BYTELANGANA TODAY

B. Yerram Raju

PUBLISHED: 6TH FEB 2022 12:02 AM | UPDATED: 5TH FEB 2022 10:27 PM

Budget leaves these ladies in search of viable options

Usually, the Economic Survey presented a day before the Union Budget is expected to lay the foundation for a policy direction. It acknowledges the challenging times for policymaking – this time against the backdrop of the pandemic impact, especially on the vulnerable sections, fall in consumption in the medium term and serious supply-side disruptions. There are some half-truths as well when it said that government expenditure has pushed consumption by 7% in 2021-22. Even credit flow was tepid till the end of the second quarter of this fiscal.

The Union government’s debt crossed 59.3% of GDP from 49.1% a year ago. Recovery of the economy is unlikely to contain fiscal deficit as the major item of investment is through public debt and less through tax revenue. The Finance Minister’s Budget speech has little substance to combat either inflation or inclusivity. It also seemed to ignore several suggestions from the pre-Budget meetings.

Roads, highways, and railways are dependent on States for making available the land but the States have not been taken into confidence and several State-led projects were not supported by the Union government

The Budget has laid, of course, a foundation for large investments in infrastructure to flow under public-private partnership. But roads, highways and railways are dependent on States for making available the land, and the States have not been taken into confidence. Several State-led projects were not supported by the Union government during the year. The same is the case with the integration of rivers —Godavari, Krishna and Cauvery.

Missing Mentions

The Budget disappoints on inclusive development and climate change. Waste management has no incentive and de-carbonisation too was little talked about. Infrastructure development leads only to temporary employment and in the context of migratory unemployment that saw people dying on railway platforms and highways, literally starving during the first Covid-19 lockdown, and their returning to work, there are no clues. Inflation is least talked about.

The increase in GST (Goods and Services Tax) on which there was wide applause is more on account of inflation than due to the increase in productivity going by the drop in IIP. There was no mention of the revival of manufacturing NPAs in Atma Nirbhar Bharat Abhiyan though the extension of the guarantee mechanism under CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) modification and Sovereign Bond replacing the guarantee for tender participation in public sector markets are most welcome for MSMEs. It is the medium enterprises that got the best of the bargain. The agriculture sector received an apologetic approach — a rise in MSP for wheat and rice accompanied by a fall in subsidy for fertilizers by Rs 35,000 crore.

Gujarat is Nation!

No wonder the Chief Minister of Telangana in a deservedly hard-hitting address, highlighted the thinking and approach of the Union government on several issues, and particularly, those relating to Telangana. For eight years, ie, since the inception of the State, Rs 42,000 crore is all that was given under Central schemes. This is far below the disbursements made by the State under the Rythu Bandhu scheme alone. Jal Shakti, the much-touted scheme of the Union government, had an allocation of just Rs 60,000 crore while Telangana spent Rs 40,000 crore on Mission Kakatiya and Mission Bhagiratha. The country holds 65,000 TMC of water with just around 35,000 TMC utilised. The water policy of the nation is in a shambles.

When the International Arbitration Centre was officially launched at Hyderabad and the State government has allotted enough space for it, it is strange that the Budget announced it as a gift to the GIFT city of Gujarat!

Uniform GST rate for toys, a policy framework for the toy industry and targeting at least 1% of the market share from China would mean a Rs 10,000-crore opportunity for the MSEs. The Budget has done little

Bihar Special Package, Gujarat Bullet Train, Karnataka Metro, Bundelkhand Defence Corridor had space but nothing for Telangana. Gujarat is the only State that received a mention in the allocations to the States as if Gujarat alone represents the nation!!

Further, the Budget should usually consider a few recommendations of statutory bodies like the Finance Commissions and the NITI Aayog. This Budget quietly slipped the recommended allocations to Telangana both under the 14th and 15th Finance Commissions depriving the legitimate share of the State in the Union Budget.

Even under the AP State Reorganization Act, 2013, allocations for important projects like IIM, IIT, IT corridor, Warangal-Hyderabad industrial corridor are forgotten despite repeated representations from the State. This squint-eyed approach of the Union government makes one wonder whether we are under a federal democracy or a unitary rule. This is the reason for K Chandrashekhar Rao calling for rewriting the Indian Constitution, which has seen more than 120 amendments.

The International Arbitration Centre was officially launched at Hyderabad but it is strange that the Budget announced it as a gift to the GIFT city of Gujarat!

Devils that lie in details

Legitimising Crypto

The Budget legitimised the illegal cryptocurrency that has the potential for killing the monetary stability of the large population by taxing 30% of those assets. Finance Minister Nirmala Sitharaman said a “digital rupee using blockchain and other technologies” will be issued by the Reserve Bank of India in 2022-23. “It will also lead to a more efficient and cheaper currency management system.”

The RBI coming up with digital currency would add fuel to the fire, as it may help only the fintechs. This could lead to financial instability in the days to come. Digital literacy is at a 32% level and general literacy at more than 45%. There is a cyber-fraud every day draining the hard-earned savings of lakhs of persons hurting their livelihoods as well.

NEP Neglected

There has been no increase in the allocation for the education sector. The National Education Policy demands at least 4-5% of allocation for the education sector but it ended up with less than 2%. The pandemic led to several uncertainties in education — a mix of institutional and digital education — and the complicity of some digital institutions awarding MBA degree that has been rightly discredited by the AICTE.

Poor Health

The health sector, despite all encomiums in her speech for the remarkable speed and efficiency in delivery of vaccines and improvements in health infrastructure during the year, did not receive even 6% allocation.

Uncertain Jobs

Employment had a serious setback due to the pandemic. Employment expectations on account of infrastructure projects under the PPP model will be project-driven and not stability and security for the persons employed. Fifty lakh persons to be employed in such projects and services sector would be a mythical figure. The Budget is hollow here.

Takers for Tourism

Tourism and hospitality sectors received a big-ticket. But all of it would depend on the people’s confidence in safe travel and safe food. Supply chains for this sector are in serious problems. The allocations would give a psychological boost for the sectors and would not materially alter their fortunes at least for six months after the Omicron settles down without any further variants hitting the economies around the globe.

Globally, commodity markets indicate a slump and have all portends of inflation.

Budget quietly slips the recommended allocations to Telangana both under the 14th and 15th Finance Commissions depriving the legitimate share of the State in the Union Budget

MSME Sector

The MSME Sector has some things to cheer about but much to mourn. Extension of ECLGS (Emergency Credit Line Guarantee Scheme) till March 2023 is welcome but they expect that the banks should extend the facilities to the most beleaguered micro and small manufacturing enterprises. Rs 6,000 crore over the next five years for a rating tool for the sector creates more fears as 98% of enterprises are proprietary and partnerships (family concerns).

The organic databases of G to C, B to B, and B to C would perform as portals with interlinkage of Udhyam, e-Shram, National Career Service (NCS) and Aatamanirbhar Skilled Employee Employer Mapping (ASEEM) portals, giving data a big push. There is no indication whether data itself would provide security instead of collaterals or guarantees sought by banks. The proposal to initiate a completely paperless, end-to-end online e-Bill System in all central ministries will greatly help MSME suppliers as it is to reduce delays in payments and make the process transparent. It is, however, doubtful whether this step would boost skilling, re-skilling, up-skilling and promote new enterprises because of the present levels of digitisation of the MSEs.

Micro and small manufacturers or service providers are sub-contractors and the FM’s announcement of substituting guarantees demanded by the governments and PSUs by a surety bond at the hands of insurance companies could be saving the working capital gap. It is important to see the fine print here and that the subcontractors get their due share.

A fund with blended capital raised under co-investment model facilitated through Nabard to finance startups in agriculture and rural enterprises for farm produce value chain is proposed. Startups will be promoted for Drone Shakti. It will be the large among the SMEs that may take advantage of this scheme. It also depends upon the way the co-investment model is structured by Nabard.

We have not seen much traction of PE/VC investments in manufacturing MSEs and hope that the Expert Committee proposed would provide sufficient comfort for the sector’s access to these funds. Extension of tax redemption by one more year for startups beyond the existing three years would help many service sector enterprises.

Micro and small manufacturing enterprises were the worst hit during the pandemic and many have not been able to revive. While speaking about Atma Nirbhar Bharat Abhiyan, the FM chose to ignore the failure of the subordinate debt scheme meant to revive the NPAs as all banks have woven a wet cloth around it. The manufacturing sector, due to severe supply chain disruptions, has grown only by a modest 1.3% (IIP).

MSEs have sought the lowest cost of capital of which, there was no mention in the Budget. Uniform GST rate for toys, a policy framework for the toy industry and targeting at least one per cent of the market share from China would mean a Rs 10,000 crore opportunity for the MSEs. The sector has been demanding cash-flow-based working capital assessment from the banks as recommended by UK Sinha Committee on which there was no word.

The Budget has done little for pushing consumer demand, particularly in the context of McKinsey estimate of a fall in the retail grocery market by 20% in the next five years.

If GST has peaked to Rs 1.40 lakh crore, it is because of inflation and not because of high buoyancy in production and productivity of the industry. Industry is struggling to stay afloat

Doing Business will be Difficult

To establish a globally competitive business environment for certain domestic companies, a concessional tax regime of 15% was introduced by the government for newly incorporated domestic manufacturing companies. The FM extended the last date for commencement of manufacturing or production under section 115BAB by one year, ie, from March 31, 2023, to March 31, 2024.

The ‘One Station One Product’ concept is laudable as a souvenir shop will help generate business and spread awareness about local art and craft.

Although the Budget 2022-23 proposes several initiatives for ‘Ease of Doing Business’, including modernisation of building byelaws, Unique Land Parcel Identification Number for IT-based management of land records, Accelerated Corporate Exit and introduction of new ‘Updated return’ — a provision to file an Updated Return on payment of additional tax, the cost of doing business is bound to go up and this will dampen the initiative.

The country needs judicial reforms and several regulatory reforms to make us highly competitive. The Budget was silent on these. The issue of high Customs duties and non-tariff barriers on basic raw material, other than steel, such as copper, aluminum, and polymers also remain largely unaddressed.

Poor, earning less than $1.90 a day as per purchasing power parity of 2011, have nothing to cheer. The Union government seems to be for the rich, of the rich, and by the rich. While rich by itself is no evil as everyone would like to be one, the road to such reach should be laid by governments. Some old tools, like more investment through PPP and disinvestment, to ensure a level playing field have been dusted off to provide the companies some cheer. The Budget is deceptive in approach and has less prospects of success.

(The author is an Economist and Risk Management Specialist)

Bluster Budget (telanganatoday.com)

Access to Finance: MSMEs

 

Access to Finance – the Achilles Heel for the MSMEs

Economic restructuring followed by financial deregulation has brought in its wake the need for a change in the very mindset of credit analysts. Infusion of liquidity into banks has strengthened confidence in depositors more than the borrowers.

Share of MSMEs in GDP was of the order of 29 percent with a credit flow constituting 15% of the total credit disbursal of Banks and NBFCs. This amounts to approximately Rs.17trn. Government of India in its overreach to $5trn economy by 2022, has proposed that the share of MSMEs in GDP should reach 50%.

We have seen the most enticing schemes under Atma Nirbhar Bharat Abhiyan Scheme 1 reached only 55% in terms of disbursements, which targeted incremental credit of 20% working capital to the pandemic-struck standard assets in the MSME sector. In regard to the second scheme that targeted the sub-standard and NPAs for revival and provision of equity banks are shy to move fast – in a once bitten, twice shy mood.

It is unfortunate that we should be discussing this issue for decades despite a number of initiatives taken by the RBI and GoI. Priority sector guidelines have been modified allowing banks to co-lend with all NBFCs with no restrictions in order to push lending to this sector. The measure should enhance the risk appetite among banks by co-sharing the risks with the NBFCs. During the years 2015-20, borrowers’ accounting practices moved to the regulatory conformance zone. This should actually rebuild the lost trust among lenders and borrowers.

In Telangana, as many as 8,435 MSME units have commenced their operations since formation of the state, with an investment of about Rs.11,487crore. Since January 2015, MSMEs have provided additional employment opportunities to approximately 1.59 lakh persons.

While micro industries account for approximately 58.07% of total units, their share of investment and employment generation is comparatively less—11.92% and 30.12%, respectively. Small units account for 63.44% of total MSME investment and 55.41% of total MSME employment—the highest for both categories.

Telangana is the only State to have set up a separate institution to revive and restructure the manufacturing micro and small enterprises, viz., Telangana Industrial Health Clinic Ltd with a seed capital of Rs.100mn.

A couple of case studies would be in order where the TIHCL have been successful in not just reviving the enterprise but also substantially scale up their operations, save the lock-down period.

In times of uncertainty as now, investors hesitate to start new enterprises except in greenfield areas like the IT and Pharma. We should not allow the existing viable enterprises to shut their doors for want of some critical funding or margin money or buttressing his equity.

M/s. Deccan Pulverisers Private Limited promoted by two women entrepreneurs, engaged in manufacturing mineral powder from quartz/feldspar mineral stones, availed a term loan from SFC to the extent of Rs.6.2mn without any arrangement for working capital. State Government has sanctioned Rs.2.1mn as investment subsidy and other incentives.

The machinery was ordered as soon as the Financial Institution (FI) sanctioned the loan, but the installation of machinery was delayed from vendors end. The business did not receive expected export orders and the promoter searched for buyers in the local markets. In initial stages could not find an appropriate buyer who can pay in 60 days due to this the receivables were delayed and the payments to the FI were also delayed, FI started charging penal interest for the delayed payments.

In the meantime, the constructed factory shed was damaged due to heavy rains and cyclone, the entrepreneur repaired the shed from his own funds. The project was not feasible with one machine as the margins were too low in the local markets the promoter has installed a second machine with his own funds and increased the unit’s production capacity.

Due to irregularities in the repayment, FI has issued demand notice on 6^th September 2019 asking the unit to pay overdue interest and instalments amounting to ₹ 20 lacs by 1^st October 2019, failing which they will take further steps like legal action etc., The promoter and the company were in the great stress as it shattered their goals and dreams.

After a detailed diagnostic study and discussion with the SFC, we arrived at a revival package for the unit. We noticed that the high interest rate of 17% p.a., and delay in arrival were the principal reasons for the unit to turn incipient sick.

 

TIHCL has extended critical amount funding that enabled him to regularise his term loan account with the SFC. We also arranged for the priority release of incentive blocked for a year. The sword on their necks has been removed and they started production in January this year. But the pandemic struck, and they could restart production only in July this year. At present they attained 80% of their capacity utilization and a turnover of Rs,8.2mn. One of the PSBs agreed in principle to sanction working capital as well.

 Another enterprise, Suresh Textiles, a sole proprietary unit similarly shattered was assisted by the TIHCL. This entrepreneur with 20 years of weaving experience has set up 40 semi-automatic power looms initially. Later he converted them to fully automatic looms to produce shirting cloth in the year 2017. He started commercial production in 2019, the year of slow growth of the economy. The unit stopped its operations during the period of upgradation for nearly six months. During this stress period he approached the TIHCL for a solution.

Problems Identified by TIHCL-

·       Ab Initio sickness detected due to inadequate financing

·       Introduction of GST post-sanctioning of loan caused additional burden on proprietor as equity parked for working capital was utilized for GST payments on machinery.

·       Subsequently this caused cash crunch for production and unit became sick within one year from establishment.

 Revival Package-

TIHCL has conducted diagnostic study and found that the unit has suffered shortage of working capital due to external factors.  It has proposed to the primary lender for enhancing the limits for operating the unit. 

As proposed, primary lender has sanctioned additional loan of ₹14 lakhs and TIHCL has sanctioned margin loan of ₹3.73 lakhs along with the primary lender for the revival of the unit.  TIHCL now handholding and reviewing the unit periodically for efficient business operations and to control the stress in the unit.  

Overall, post revival and rehabilitation by TIHCL, the unit is performing well and improved chances of growing the business.  From nil capacity, the unit has reached 50% capacity utilization during the last three months and is confident of reaching 100% capacity in the next four months.  His experience taught him that raw material bought from outside the State would save the input costs by 15%. He is prompt in repaying the instalments and is now poised for growing big.

 Both the units have digitised their operations and installed ERP solution that enabled the TIHCL to monitor off-site the units’ performance regularly and guide the entrepreneurs.

 In more than 80% of the units that knocked our doors for support, we noticed that their working capital eroded with the banks debiting the instalments on the retail loans sanctioned to them – either for buying a car or home or both. Where the housing loan is taken this automatically collateralized the otherwise CGTMSE guaranteed loan. Their failure to repay due to the eroded working capital, turned them NPA and proceedings against their securities followed as a natural course. MSMEs were the first option of banks to lure them to retail loans, that became their thrust area. It is advisable for the MSMEs to take retail loans from banks other than those that granted them the working capital and also have proper financial planning for their personal assets and enterprise assets for growth.

 Transunion CIBIL has also announced a MSME Health Index based on two parameters – growth and development. Growth is based on the enterprises ability to access credit while development is assessed on the basis of NPA status in banks.

 Rating institutions are yet to come out with rating specifically targeting the manufacturing MSMEs. There are several issues in rating mechanisms and also the extension of guarantee by the CGTMSE. These need resolution for easy access to credit.

 Digitization of all enterprises does not brook delay. Telangana Government entered into an arrangement to provide free accounting software to 20000 enterprises to accelerate digitization. This will certainly bring transparency, accountability, and better compliance of the lending institutions’ terms and conditions of sanction thus rebuilding the lost trust among the banks and MSMEs.

 TIHCL is a co-lending institution and the banks that are interested to speed up their processes of revival and restructuring and take assistance for monitoring and supervision of their MSME assets are welcome to seek our support. Nothing comes free. But the costs that the enterprises and banks incur in their collaborative efforts with us are far minimal and we assure that their NPA portfolio would turn performing with their association with us.

 TIHCL has tailor made loan products for various types of stress faced by the MSEs and for women start-ups and for cluster-based units. Margin loan assistance, Critical amount finance, Margin money for start-ups, working capital requirements for the other types of enterprises. Every enterprise is digitised for its operations under our direction and support. It is for the units and banks to take advantage of our presence. Rates of interest range between 9 and 10 percent.

 TIHCL is keen on ensuring sustainability of enterprises through timely counselling, mentoring and advisory services on a continuing basis and this is our USP.

(This is the text of my address at the MSME Summit held by the CII-Hyderabad on the 7th November, 2020)

 

Coping with post-COVID-19 Disruption

Coping with post Covid-19 Disruption

Post pandemic prediction can’t be a soothsayer’s job. Preparing the economy from a tremendous shock and staying inside home for nearly a month in some States and could be longer as we see the accelerated rate of spread of Covid-19 hit persons, is the biggest challenge. India is not a city state like Singapore or Finance hub like Hong Kong. The optimists expect the lockdown to be lifted by the 14^th April while the less optimistic put it to the end of April. We need to think of the strategies and actions phased over short, medium and long term with matching resources right now. This should be both sectoral and geographical specifics.

While we are the leading global pharmaceutical suppliers, the low and inefficient health sector management with historically low outlays suddenly got the awakening call with the CVD spread and the need for public health systems to step up their capabilities. Yet, the call of the nation has been very ably responded to the greatest consternation of the rest of the world.

The country, with diversity nowhere else existing, is the biggest challenge and opportunity to the governments. Diversity has capacity to cross hold risks across segments and has innate resilience when calamity befalls. It also provides scope for innovation as people think more actively under pressure than leisure. When none can be in laid back comfort that existed before, people keep working out differently different things. For example, there have been more webinars during the last one month than during the last six months. There have also been more video conferences and skype calls as people started working from home. This may gradually turn out as new order of functioning.

One of my nieces from Bengaluru tells me that as Director of a Union Government organization working from home became a true challenge as deliverables rest with her than with other members of her team. Even the forgotten kitchen started demanding her time with children demanding newer tastes and new dishes. This is making her work for 14 hours instead of 7 hours in office. There is a whole paradigm shift in the work environment., not for one but many like her – with no gender discrimination.

What would be the future like? Very many organizations could find new economies of scale in a combination of work from home and work at office. More factories will have to think of reworking their supply chains that thoroughly disrupted due to the CVD, New leadership paradigms emerge. The 10 percent manufacturing small enterprises manufacturing gloves, sanitizers, masks, medical emergency kits to combat CVD will find near extinction of such market. They should expect this to happen and therefore prepare from now on the way to re-engineer their process to newer products and new markets. They will notice that institutions and persons that were after them during their need will turn their faces and likely to hold up their bills in their search for finding cash margins for fresh initiatives.

Our country will have to reinvent itself in workspaces and relationships like never before. In this process, at the micro level, enterprises will re-engineer their production and processes and search for new markets. Many will find the exit to be a problem.

Amidst a supply driven crisis, the unrest and plummeted resources of all kinds, as also eroded markets, MSMEs will require sustainable process consultants to rescue them at affordable costs. Here, the governments in looking at the sovereign dues and the banks looking at the stuck balance sheets of MSMEs should learn the art of turn around management or seek recourse to experts in turn around management.

Every nation will be on the uncertainty horizon. Risk mapping will be difficult. Everyone has been a looser. Non-performing loans will surge unless the thresholds change. Indian regulators need not wait for the world to guide them. They can guide the world. BCBS has already provided for applying the thresholds for SME sector as per the needs of the country. The time for action is now. The threshold should move to a 180day horizon till December 2020 subject to a review after six months. This will automatically provide for higher leverage in lending for the MSME sector, the nerve wire of production that has been contributing 35% of GDP, 45% of exports and employing 112mn persons.

The poor and daily wage earners, the hawkers, the wayside eateries, many disabled, contract workers – both skilled and unskilled, need government subsidies, even salary buffers, supplies and cash to meet their daily needs for at least three more months until the industries and enterprises re-look for employing them.

Fiscal responsibility under these circumstances of both the State and Union governments already hit by the lowest ever tax returns requires out-of-the-box thinking to meet the situation. Several relief funds of the CMs and PM, private donors and even CSR funding even amidst the near 10 percent hit on most corporate balance sheets would be inadequate for revival of the economy. It may take at least nine months to one year to cone to a new normal which would be far less than that we had in the slowing economy.

Even if people have cash in their hands, which itself is doubtful, they will not get the goods and services as the lockdown succeeding the slowdown of the economy, there will be supply driven inflation. Scarcity stares in all areas.

Courage is the watch word. In times of distress people display amazing unity while immediately after normalcy is restored the same set of people will most likely diverge. While the demand to lift the lockdown in toto will surface with more vigor than now, it would be prudent to release in parcels to rework on the efficiency of the health sector infrastructure, doctors, nurses, para medical staff on one side and on to ensure that the wheels of production get back to normalcy gradually, on the other. Second, the discipline enforced should be redirected to finance, transport and manufacturing sectors.

The focus of trade will suddenly think of new protectionism, new direction of investments, newer regional allies in trade and new relationships. The denuded investor firms and the huge number of corporates off-loading the bonds in the markets for liquidity are bound to put pressure on the financial sector. This recession is very unlike the 2008 or even 1930 and it will be a prolonged and widely spread across 200 nations in the globe.

Banks are systems driven and not enterprise driven, Unless the instructions are fed to the system, the concessions do not take effect. In several Banks, even the usual half-yearly reviews of several accounts on a regular basis did not take place. The disaster today is extraordinary and requires extraordinary speed of action post new normal.

At a time when the demand for credit is at the lowest level due to several manufacturing and trading enterprises shut their shops due to lockdown and are seeing future as more uncertain than now, liquidity doors have been kept open by the RBI as though that was the problem area that required urgent attention. Even during the last six months RBI has been extremely accommodative to Banks both in capital buffer and liquidity commitments. But the credit did not move to a higher zone in non-food segments.

“These capital and liquidity buffers are designed to support the economy in adverse situations,” as the Fed said in a statement. Fed’s other hope is exactly what the India incorporated is looking for: less rigidity from the banks in extending the required debt, post pandemic. COVID-19 has caused serious disruption to global supply chains and has a huge impact on financial markets and trade ecosystem. It is important to retain the customers and governments post pandemic and rebuild their lost supply chains to operate sustainably.

India’s biggest advantage is its demographics and therefore, the future needs to be addressed with alacrity so that entrepreneurship will not be governed by the hoary past but a bright future.

The Author is an economist and risk management specialist. The views are personal.

Published in Money Life 2^nd April 2020; www.moneylife.in

Enhancing Competitiveness of MSMEs in Slowdown

Strategies for enhancing Competitiveness of Manufacturing MSMEs:

Muted manufacturing with PMI just around 51, a fall from about 54 almost couple of years back, increasing protectionism of the US, UK with the BREXIT winning a thumping majority for Boric Johnson and global trade winds heading to recession have taken the toll of India’s growth story. Industry would face more challenging times than before due not merely to adverse headwinds on external trade but the turbulence in the domestic economy. Enhancing competitiveness for manufacturing firms in the small sector has several challenges and these can turn into opportunities for growth.

Inefficiency, increasing fraud rates and faulty Bank Balance sheets of almost all the major Banks in India compounded the woes of domestic debt markets. No surprise that the equity suppliers like the VCs and Angel Funds are distancing themselves. The impact is the most on the vulnerable – MSMEs, particularly in the manufacturing segment. The thriving or successful even in this current environment are those SMEs in the Defense, Aerospace, Gems & Jewelry, pharmaceuticals and a few agro-industries linked to market giants like the ITC.

Nobody can have a guess of how many MSMEs shut their shops due to the Banks’ unwillingness to revive despite the RBI and GoI instructions as no ‘exit’ statistics are captured. The corporate sector exits alone show up in the data because the Ministry of Corporate Sector statutorily demands it and IBC has become a barometer for industry and financial institutions’ health.

Banks never gave data on number of units financed or closed but only number of accounts. Each unit can have number of accounts: term loans for specified purposes; working capital – cash credit, overdraft, SME Plus, etc., and unfunded limits like LCs, Guarantees etc.

Since 98 percent of the MSMEs are either partnerships or proprietary and are linked to onetime registration on Udyog Aadhar, there is no way the closed shutters get into the data. Even the industry and trade associations do not get a wind of the closures as several so-called members are irregular in the payment of membership subscription annually.

This scenario leaves the policy maker to public noise and a wild hunch. Every State is concerned about improving the ecosystem for the MSME sector and more in conjunction with the Union Government. States do know that a robust MSME sector is a red carpet for the global investors. However, improving the MSME competitiveness remains the biggest challenge and it requires a more holistic approach than now.

Information asymmetry and adverse selection continue to be the biggest blocks for institutional interventions, both financial and non-financial. Several MSMEs complain of a serious setback due to demonetization and GST. The reasons for such a far cry should be seen in the advantages they got without them: cash sales not routed through the bank accounts and yet several MSEs thrived until their debtors ditched them; inventories over-invoiced could get into the recorded working capital cycle with banks as the banks have been going by what is shown to them instead of what they should see and count for want of field visits; there have been many qualified ‘account experts’ to show the convenient excel spread sheets for securing working capital limits from banks; the small volumes these enterprises produce and the small size of the firms have also distanced them from the reach to markets; and there have been very few mentors and counsellors to advise responsibly either from the financial institutions or others to advise the units right financial discipline would get them all the gains they are looking for as also their entry to new markets.

GoI on its part, unleashed MUDRA, SME99Minute Loans and whipped up the Shamiana Camps that could give the lever to the FM to announce that the Banks sanctioned 8lakh loans amounting to Rs.70000cr in just two months, which they could not do for years!! Future NPAs would show the unknowns and unseen among such crowd. Dy. Governor, RBI recently sounded the alarm on the growing MUDRA account NPAs.

MSMEs on their part should earn their right to grow by following best accounting practices. Working capital management basically rests on four important factors:

•       Predictability of Cycle

•       Material flows

•       Receivable – overdue

•       Independent Credit rating agencies’ assessments.

Some more essentials are set out below:

(i) Realistic Assessment of Morale Building Assurances: MSMEs would be well advised to cautiously assess morale building assurances during the current slowdown of the economy. MSMEs which accepted such assurances in the backdrop of global recession of 2008 and built up capacities and kept up production levels, resulting in very high inventories, were devastated. Furthermore, when demand for a product falls, there could be pressures on small enterprises not to cut output as this would eventually result in labour lay- offs. Units that accepted such suasion faced disastrous outcomes.

(ii) Capacity Expansion: Quite often, MSMEs come to the erroneous conclusion that their product would experience an unrealistically high increase in demand. Units which build up capacities on tenuous information invariably end up with serious problems. In a savagely competitive environment, it is these small units that end up in ‘fire sales’ which are available to buyers at attractive prices. There is merit in building up financial resources to avail of such opportunities rather than increasing the capacity of their existing units. It is time to realize that coopetition would bring better synergies among similar producers to meet up with temporary surge in demand.

(iii) Interest Rate Cycles and Excessive Dependence on Bank Credit: During the expansionary phase of the credit cycle, banks are only too willing to lend but during the downturn small borrowers are invariably the first casualties in being denied additional credit. As an abundantly prudent measure, MSMEs are well advised to seek bank credit essentially for inventory financing but be very cautious when using bank finance for capital expenditure. Excessive borrowing for capital expenditure generally puts MSMEs in to distress during cyclical movements in the economy. It is good to learn to build equity gradually from out of the revenues and avoid excess leverage. They should learn to conform to financial discipline when alone they will win the trust of investors. Strategic partnerships are best bet in times of stress and not overindulging in debt. It is good news for the MSMEs that Government of India has extended the Interest Subvention Scheme up to March 2021.

(iv) Importance of an Appropriate Exchange Rate: MSMEs account for about 40 per cent of exports. It is unfortunate that there is a widely held perception that a strong rupee exchange rate reflects good macroeconomic management. This is clearly erroneous. Large industry is generally import intensive while small industry is export intensive. Hence a strong exchange rate of the rupee (i.e. an overvalued rupee) helps large industry and hurts MSMEs. It is not as if the exchange rate should be excessively undervalued. As a rule of thumb, over the medium/long-term, the nominal exchange rate of the rupee vis-à-vis the major industrial country currencies, should be adjusted downward based on the inflation rate differentials between India and the major industrial countries. An overvalued exchange rate makes MSMEs uncompetitive in international markets. MSMEs should not attempt to be forex traders; they should concentrate on their own line of production.

As a staunch optimist and believer in the excellent capabilities of MSMEs in innovation, incubation and future growth, least expensive handholding, mentoring and counselling as process consulting tools have immense scope to become highly competitive both domestically and globally if certain synergies are built into the system. Telangana Industrial Health Clinic Ltd has adequate capabilities in this exclusive portfolio of handholding, mentoring and counseling as a preventive and stress relieving measure.

Supply Chain to Value Chain:

There is need for building ‘pools’ or aggregators to gain both cost advantage and brand image through co-branding of products.

India Mart are trying to do supply chain aggregation. MSME online Bangalore is also trying to evolve an ecosystem where a lot of questions of MSME are getting answered by about 50 consultants and they have started CEO Club for taking MSME entrepreneurs to next level by having a monthly meeting. Jeevan is trying to develop a 360' view for developing the ecosystem in Hyderabad on Hub and Scope model. These are welcome initiatives, no doubt. They need traction.

Many of the user population should not merely know such initiatives but should also know how best to access them. Second, by aggregators, I mean those that are fully capable of building a common brand for a set of products from the micro and small manufacturing enterprises through building also their capacities and capabilities to rise above their existing levels, introduce those practices and technologies that make them closer to the global standards even if sold in domestic markets and secure price at their doorstep within the promised wait-in period. These would mean investment on the part of aggregator and a price that the aggregator should legitimately get for such services without losing the competitiveness in the market. Ipso facto, it would mean that at the firm level, cost reduction should take place at each link in the value chain. There are different ways of doing it.

The Industry Associations can develop a Marketing Arm and establish net linkages with e-commerce players; 2. they can help the industry avail the host of incentives waiting to be used from the GoI-MSME schemes; 3. they can establish linkage with NSIC, MSME-DI and such other institutions. 

MSMEs should earn their right to grow. This happens only when they are quality conscious where precision, functionality and producing premium products will be their driving forces. Their passion and pride rest on satisfied customer. Intellectual property rights, improved technology processes and getting equity to fund such technologies are all their sustainable future. Employee retention strategies depend not just on higher remuneration but on building trust and social cohesion as also gender equity.

MSMEs should also realize that death is a process of development. They must know when to exit from the enterprise and how. Strategies to clear sovereign dues and realization of overdue creditors on a mission mode pre-exit have a clear role. Ignoring them will be suicidal.

*Author of ‘The Story of Indian MSMEs: Despair to Dawn of Hope’ (2019) is an economist and Adviser, Government of Telangana, Telangana Industrial Health Clinic Ltd., Hyderabad (www.yerramraju1.com)

https://www.moneylife.in/article/enhancing-competitiveness-of-manufacturing-msmes-i/58932.html 18.12.2019 and 19.12.2019

The Economy in Dilemma amidst Political Stability.

Union Budget by the first lady FM in 50 years is amidst great expectations in this era of political stability. For her, all is not hunky dory. GDP growth is projected by the RBI at 7.1% for the current fiscal. We can set aside for a moment the arguments of Arvind Subramanian and the controversies surrounding the calculus of GDP.

CEIC data reveals that consumer confidence grew at 14.8% in March 2019 compared to the earlier quarter although Business Confidence declined to -1.1% in June 2019 compared to the earlier quarter of a growth of 0.4%.

The dilemma: household debt was 10.9% of GDP while external debt was 20.1%. Private consumption declined to 59.3% of its nominal GDP in March 2019 declining by 2 percentage points from the previous quarter. Gross savings rate was at 30.9% of GDP. With the number of census towns increasing by 186% in 2011, urbanization of India moved to 31% space.

World poverty statistics show that poverty declined to some 70mn in June 2018 from 306mn in 2011. This should mean that spending money to keep people above poverty line, euphemistic subsidies should sharply decline. But the Union and several States are releasing unemployment allowances and loan write-offs along with caste-based dole-outs in the name of poverty!!

NCAER statistics place the middle-income population at around 153mn while the lower middle-income population is at 446.3mn (Krishnan & Hatekar, EPW 2017). The salaried persons constitute still the dependable taxpayers. There is only a marginal increase in tax to GDP ratio between 2008 and 2018 from 17.45% to 17.82% while the GDP and per capita income have doubled during this period. Relentless efforts are needed against tax havens.

We have seen the way audits are conducted calling for disqualification of the so far reputed Deloitte, PWC not excluded. Hiding incomes has become honourable and paying taxes honestly unwise. This situation unfolds great opportunity for the FM to see new frontiers in taxation. Direct Tax code is expected to change and it may tilt the scales.

All the legislators and Parliamentarians with very few exceptions are billionaires. It is time to start rationalizing subsidies and incentives for this group. There is also a case for taxing the rich among farmers – defining them at a threshold of six times to eight times the salaried. The mechanics are difficult but not impossible. Of course, most of them being in politics, irrespective of party affiliation, would engineer ghost rallies against even any modicum of such thought but should be fought over by a stable government trading off with the benefits for the rest of the farm sector.

Manufacturing growth is almost stunted amidst continuously declining credit for the last five years but for the recent marginal increases. Incentives to manufacturing start-ups should be more fiscal than financial and rebuilding the eco-system for sustainable manufacturing growth brooks no delay.

The rural-urban hiatus can be addressed adequately by encouraging investments in modernizing agriculture and value addition initiatives in rural areas. Rural industrial enterprise clusters or Rural Enterprise Zones (like the SEZs) can be the best answer and therefore, fiscal concessions for such investments will two birds at one shot: achieving employment and economy growth.

Actual projections for such fiscal outgoes would be far less than the bonanza that the urban and rich as also the corporates expect from the FM. In addition, as I have been untiringly mentioning since 2005, a percentage of share transaction tax in a rising economy and growing stock market would fetch to the exchequer instantaneous revenue with no tax administration expenditure.

Government should stop incurring public debt to save irresponsible lenders with capital infusion just because it happens to be the owner. Any additional capital from government should go with stringent conditions on the Chairpersons. Governance improvement shall be the focus and the RBI should withdraw its executives on all Bank Boards so that its regulatory rigour can be on par with a food regulator at the time of introduction of new products.

Women have more courage than men when it comes to the question of saving a child from a disaster. Madam Finance Minister should be able to pull it off.

*The Author is an economist and risk management specialist. The views are personal.

https://www.moneylife.in/article/will-political-strength-lead-to-a-bold-budget/57522.html

Published on 24^th June 2019

Enable MSEs breath fresh air

B. Yerram Raju

Banks want to revive. Large industry wants to revive. Firms like Jet Airways, Zee, Essar Steel and the big are given breather by the Banks and they are all NPAs for more than a year. Reserve Bank of India also encourages Banks to come out of the red. But when it comes to the micro and small enterprises (MSE) who have been vendors to the large firms and part of the supply chain, Banks almost shut the doors.

Interesting backdrop emerges from the latest Financial Stability Report. Discussing the sectoral deployment of Gross Bank Credit, exposure to industry sector expanded by 2.3% in Q2 FY19 as compared a meagre 0.7% in Q4 FY18. Large industry gained the most with almost 3% increase in exposure in the most recent quarter, as compared to 0.8% recorded in March 2018.

The manufacturing MSME segment on the other hand languished further as it experienced a negative growth of (-) 1.4% in September as compared to nearly 1% credit expansion recorded in March. Banks continued to be risk averse as much of credit increase occurred in working capital segment and not term loan segment.

Banks are no less to blame than the MSEs for their ills. Many MSE projects have been financed without consideration of the total costs of the project in most cases that came to our notice, that includes machinery installation costs, rates and taxes including GST, loading and unloading charges, transit insurance costs and other connected expenses.  Trial run for commercial production that should be part of pre-operative costs is also not included in the total project cost.  In addition, interest during the construction period is also debited to the working capital account opened simultaneously with the Term Loan account while such working capital account should be opened only from the date of commercial operations. Consequently, even by the time the unit starts commercial production, the unit becomes sick.

Moratorium should start from the date of release of last installment whereas most banks are starting from the date of first installment.  Sometimes, project implementation delays like delay in release of successive term loan instalments, receipt of imported machinery and its erection etc., would result in time overruns and cost overruns besides repayment starting well before commercial production.  This practice leads to inadequate financing of the enterprise and this is another contributory factor for sickness of the enterprise.

RBI’s Master Directions dated March 17, 2016 on Revival and Restructuring suggest that each Bank appoint Zonal Committee to consider revival. Corrective Action was to be initiated for Special Mention Accounts – SMA within certain time frame: SMA-0 to be provided corrective action. SMA-1 to go for restructuring and SMA-2 for recovery. Zonal Committees were not formed; even where formed, there is no record as to how many have been revived following the Directives.  Though RBI Empowered Committee meets every quarter no reliable data on the revival of manufacturing MSEs was available. RBI’s instructions on manufacturing micro and small enterprise revival seem glossy.

Yielding to the pressure of MSME Ministry, RBI on January 1, 2019, i.e., after a lapse of two years and over since the Master Directions, new directions for restructuring were issued. This circular clearly says that the standard assets SMA-0,1,2 need to be restructured and the exercise should be completed by March 2020 for loans up to Rs.25cr. There is an overdrive among banks now to restructure the SMA accounts. This is certainly a very efficient NPA-preventive tool if effectively implemented.

Neither the RBI nor the Banks consider ‘a known devil is better than an unknown angel’. Some unknown angels are fast turning into unknown devils as well.

The major issues in revival are: NPAs for revival require fresh margins from the beleaguered enterprise; provisioning continues at the same level even after revival; Banks do not have time to have dialogue with the entrepreneur when the unit develops symptoms of sickness; long drawn illness turns into a potential cancer turning the unit unviable. Weeding out willful defaulters is possible even in the first quarter of default during which time banks invariably tolerate.

It is intriguing that the units closed for six months due to failure to pay up electricity dues remain active in banks’ books of accounts. Good number of them has the potential to revive unless they willfully defaulted. During the first 3months of such non-payment of electricity dues proper diagnostics would help the revival.

1.         All NPA-MSMEs in manufacturing sector up to Rs.1cr due for consideration for revival even though the banker may take a different view, should be referred to an external accredited institution (EAI):

a.         Such accreditation could be given for an independent organization like the Industrial Health Clinic wherever set up or to a Committee set up by the State Government involving bank representatives that should include MSME-DI. The Committee should also hear the entrepreneur.

2.         Above Rs.1cr but up to Rs.25cr, such consideration for revival shall be referred to a Committee of the Bank at the appropriate level that should include ‘MSME Expert’, MSME-DI representative, and a State Government representative in order that interests of sovereign dues is taken due notice of and equitable attention is devoted for their recovery as part of revival package.  The committee before taking any decision should hear the view point of the entrepreneur, Revival Policy of the state government and record the same in the minutes for considering or otherwise duly giving valid reasons thereof.

4.         All such revival package shall consider the following financial facilitation:

a.         Freezing the status of the classification of asset on the date of reference to the external institution or the Committee of the Bank for one year or till the date of rejection.

b.         Reversal of penal interest and other penal charges;

c.         Charging simple interest at MCLR from the date of reference for one year;

d.         Fees/Charges levied by the EAI including IHCs should be borne by the GoI through a special fund set up for the purpose;

e.         Bank should share ‘pari pasu’ charge on the borrower’s assets for any external funding towards borrower’s margin including such funding by the IHCs;

f.          Additional funding where required, should be charged at MCLR by the involved agencies.

Such guidelines should be applicable to all the Banks, NBFCs, SIDBI and SFCs. ‘Behind every small enterprise, there is a story worth knowing.’

11 Point Plan for the Union Budget 2018

An 11-Point Agenda for the Union Budget

Dr B Yerram Raju

18 January 2018  

Weighed down by internal pressures from the party to present a Budget that gets accolades from a large voter constituency in the face of General Elections 2019, Finance Minister Arun Jaitley,  has a few ready options to pep up the economy.

1. Go all out to clear the misgivings on the Financial Resolution and Deposit Insurance (FRDI) Bill by incorporating oral assurances given in the Parliament into the proposed Bill.

2. Announce a winding up plan for the sinking PSBs instead of piling them on to those that are working efficiently.

3. Insist on all the banks to stick to banking work instead of selling third party products that carry hefty commissions as these products are invariably dumping unknown and unannounced risks on the unsuspecting users. Restart development banks to finance Infrastructure. Turn banks into growth engines.

4. Announce withdrawal of government funded programmes that failed to take off or made only a symbolic entry. Over 110 schemes launched for the Micro, Small & Medium Enterprises (MSMEs) failed to reach even 0.5% of the eligible enterprises. These resources can be earmarked to finance those schemes that showed performance. 

5. Re-engineer financial incentives to go online only with appropriate safeguards also announced. Fiscal incentives have more transparency than financial incentives. 

6. Scrap all the cess hat have no specific account of expenditure earmarked for them.

7. Appoint a committee to amend the treasury code with its rules formulated during the British Raj. This is the root cause of corruption and delays in the release of funds for government expenditure. 

8. Announce the date for incorporating the related Rules whenever the Parliament passes a particular Bill, so as to remove ambiguity and ensure compliance. Every Act must have priority do-ables for all the stakeholders as an Abstract. 

9. Introduce a modicum of agricultural tax, with a threshold of income over Rs25 lakh per annum. All the small and marginal farmers, as well as tenant farmers will be exempt as they would have not earned this much even for a five year period. The rate for them can be 10% over the Rs25 lakhs. Multiple slabs need not exist for them.

10. Manufacturing start ups should be tax exempt for five years or till their turnover crosses Rs2 crore.

11. All corporations spending a minimum of 5% on research and development or incubation centres recognised by the governments shall be exempt for such spend, treating it as Investment.

The FM would do well to make specific allocations for agriculture, education and social services that make good sense not just from the viewpoint of electoral benefits but as overall economic benefits. It is obvious that the Fiscal Responsibility and Budget Management Act, 2003 (FRBM) will be thrown overboard but for some jugglery with numbers. There are a few states like Telangana, AP and Karnataka that have introduced agricultural budgets. It will be necessary for the Union government to go in sync with the states in its ideal of cooperative federalism to ensure the outcomes.  

(The author is Adviser, Telangana Industrial Health Clinic, Government of Telangana. Views in this article are personal.) 

  

 www.moneylife.in/18.1.18