Draft MSME Policy falls short of reality

 MSME vision falls short of reality 

BY TELANGANA TODAY

21 FEBRUARY 22

By B Yerram Raju

The Draft National MSME Policy, targeting V-shaped recovery after the Covid pandemic and the $5-trillion economy by 2025 (since extended by two years to 2027), seems to have seen the world more than India. There is a virtue in looking at the policies of other countries during the pandemic. However, the policy nowhere mentions the reasons for not adopting some of the policies, particularly employment as one of the criteria for defining the sector, when we say from rooftops that MSMEs are employment-intensive.

The virtue of the document is the Vision: “Stimulate efficiency and productivity of MSME sector to generate income, employment and become part of domestic and global value chains taking into account structural transformation, competitive edge, demographic dividend, and regional balance.” The objectives highlight building an eco-system for the growth of the sector, sensitising stakeholders, creating physical infrastructure and linkages amenable to MSMEs, developing a framework for accessible and affordable technology upgradation, and an appropriate institutional mechanism

Historical Data!
It wants to develop a platform to create an integrated database under a uniform format. It nowhere mentions that a census of the sector will be taken. Its data for the present is historical – a mess-up of manufacturing and services. 63.9 million enterprises and 111 million employment are figures of 2015. Where could one find the six crore units while one finds only 70 lakh on the Udyam portal? According to the NSSO data (73rd round), 14 States account for 88% of the MSMEs. While 98% are micro-enterprises, only 11-12% are in the reckoning for manufacturing.

We must have a periodical census of the MSMEs that spread across several sectors – agriculture, KVIC, artisans, rural development, technology, food processing — as none is aware of the mortality of enterprises. A study of 1,079 units of Sidbi in the wake of the pandemic revealed that 63% of units are closed and 67% lost 50% revenues. ISID (Bengaluru) found out only 16% of micro manufacturing units (as defined in July 2020) are functional. The mortality of units is not captured in any reliable data frame. This will be possible only when a census is taken periodically.

It has extensively given the facilitation to the SMEs in several countries but mentioned only 6 States’ policy innovations in Annexure-IV that represent 28% of MSMEs in India (NSSO). It is good to see the extensive reference to the Prabhat Kumar Committee (2017) to which no reference has been made during the last five years and very useful inputs have found a place in the draft. Widening the Tool Room set-up is a welcome policy intervention.

Legal Reform
As the MSME Development Act (2006) has dealt with the MSEs, an important subject of the Act, disproportionately, a separate law should be enacted and while so doing, redefine the sector in terms of the twin criteria of employment and turnover as investment by them will not cross Rs 5 crore. This would facilitate scaling up as well.

Existing EPF is hardly adequate to take care of eventualities as we noticed in the pandemic. Like in the farm sector, all such enterprises should be covered with specific insurance for employees. This would also enable data on employment more dependable for synchronisation of other benefits to the sector.

Definition
The consequence of the revised definition on the twin criteria of investment and turnover has been dealt with but failed to emphasise its effect on the manufacturing sector. Till date, many do not know whether it is retrospective, if so from which date and if not, from which prospective date it is applicable. While we welcomed the change in July 2020, six months after the first Covid attack, micro enterprises in the pre-July 2020 period were virtually the most hit.

Relief Measures
Banks did not extend the Atma Nirbhar Bharat Abhiyan scheme -1 covering moratorium and 20% increase in working capital to the micro manufacturing enterprises. Among the small, those who had collateral securities and the medium enterprises or mid-corporate enterprises were extended the benefits, according to a few sample surveys conducted by RBI (they did not reach out to the micro), Sidbi, ILO, Skoch, IMT, etc.

A sample study of 1,079 units in the country over the effect of Covid-19 that Sidbi presented should unnerve the economy: 67% of the MSMEs are half-shut, and 63% closed. Where did the money spent under Atma Nirbhar Bharat to the extent of more than Rs 3 lakh crore go?

Facilitation, Promotion Councils
The objective of the facilitation council – resolving delayed payments of MSEs – has been side-tracked and the policy contours expected from the States has been expanded to converting them into promotion/development councils in coordination with the National MSME Promotion Council. They should have first targeted strengthening the MSEFCs, as they are quasi-judicial, and then considered establishment of MSME Promotion Councils with specific institutional framework and objectives of functioning.

Funds and their utilisation
No evaluation of various funds and Fund of Funds released during 2020-22 through Sidbi and SBI has found a place, either for continuance, modification or enhancement. Which sector has benefited the most? And what further steps are needed to get effective returns on such investments and incentives? Answers are needed to these questions.

Budget Utilisation
Of the Rs 7,572.20 crore earmarked for the MSME Ministry in the Budget 2020-21, Rs 5,647.50 crore was spent across various schemes while the remaining 25% or around Rs 1,924.7 crore was left unspent. In comparison, 99.39% of the allocated Rs 6,552.61 crore during 2018-19 and 95.81% of the Rs 7,011.29 crore allocated during 2019-20 were spent with only less than 1% and 4% of underspending respectively, said the MSME Minister in the Lok Sabha.

Equity should flow to the sector from the Fund of Funds at the lowest cost to the MSEs. Following suggestions of the Prabhat Kumar Committee, meeting a part of listing expenses for small enterprises scaling up to medium or for raising equity in the stock exchanges, establishment of SME Equity Fund, modifications to the rating scheme specific to manufacturing MSEs, and creating a separate fund for Revival and Restructuring through a separate Industrial Health Clinic like in Telangana need incorporation in the policy.

State-specific Brand Equity Fund from Fund of Funds should be set up by Sidbi on the following norms:
•All SMEs can co-brand with this if they have ISO certification or any other globally accepted certification standard.
•Share in the equity would be dispensed by the State government through a specially constituted committee in proportion to the size of the business.
•Misuse or abuse of the Brand would entail heavy penalties including criminal prosecution where warranted.

The Market Development Fund currently in operation has not reached many units in the small-scale sector. This fund should be accessed by the State government and dispensed through the same expert committee constituted for the Brand Equity Fund. Like the Trade Development Board of Singapore, this MDF should be made available for those SSI units co-branding and joining for large tenders of other State governments or any global contracts as a loan for matured tenders and as subsidy for unmatured tenders.

The author is an economist and risk management specialist. Views are personal.

 

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)

Prof. R. Radhakrishna, Eminent Economist

 

A Tribute to Prof. R. Radhakrishna, Chairman, Centre for Economic And Social Studies

A treasure trove in economics and econometrics – he has left a big void with his sudden demise on 28th January 2022. It is difficult to imagine he is no more. I had three interactions after his movement to Visakhapatnam following his illness. Pandemic did upset him greatly. Even in our brief interaction, he expressed his deep distress over the impact on the poor and migrant labour that the pandemic has been causing.

My first association with him was when he worked with the Agro-Economic Research Centre, Andhra University in the company of Prof. G. Parthasarathy, a great economist of the times. “Professor Radhakrishna’s life-long work on Growth, Inequality, Food Security, Poverty, and wellbeing is widely recognized as illuminating, authentic and credible.” (Ch. Hanumantha Rao, in a blurb on his book – The Essays on Indian Economy). 

During my association with Farm and Rural Science Foundation, I invited him to deliver the first J. Raghotham Reddy Memorial Lecture. He readily agreed and laid a firm foundation for further work of the FRSF. After my joining Administrative Staff College of India, my interaction with him became closer. He invited me on a few occasions to talk to the researchers of CESS on the research ideas and methodologies on credit to the poor.

When he moved to IGIDR, he associated me for a meeting to discuss the syllabus of Law And Economics Course. He involved me in a couple of Committees he chaired: Agricultural Indebtedness and AP Agriculture. He is a great leader and effective coordinator. His commitment to research and a concern for the common man, and belief in institutions that could contribute to the development of the poor, like the cooperatives, FPOs leave an imprint on the Indian economy.

When I requested him to write a Foreword to my book on India’s Economic Resurgence, he readily agreed and released it in the CESS Auditorium.

His erudition on Poverty Studies and Agriculture gave me immense benefit. My interaction with him at the Andhra University, University of Hyderabad as Vice Chancellor, as Director, CESS and IGIDR, Chairman, ICSSR, and Chairman of Indian Society of Agricultural Marketing gave the new angle in him. He is a great administrator, researcher,  a good teacher, affable person, a good conversationalist, and a great human being. I am sure the galaxy of researchers built by him would carry on his legacy. I bow to him in all humility. May his soul rest in peace.