MSMEs and the Union
Budget 2019-20
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.
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