This year’s budget has announced specific steps that provide a positive direction to the micro, small and medium enterprises (MSME) sector for growth. One such long-overdue step is the announcement of revision of the existing definition. The threshold limits of defining MSMEs were set way back in 2006 and, while global MSMEs are a lot larger than Indian MSMEs, the definition makes it difficult to create linkages between MSMEs in India and the MSMEs worldwide. Further, the present definition is based on investment in plant and machinery for the manufacturing sector and investment in equipment for the service sector. Inflation has increased the cost of investment under both categories, and this strengthens the case to expeditiously review the definition based on investment criteria. It would, therefore, be desirable to take into account turnover or employment or a combination of both with an increase in investment threshold in the revised definition.
Second, the budget has announced an investment allowance at 15 per cent for three years to manufacturing companies that invest more than Rs.25 crore in plant and machinery. It would be more practical to make it cumulative for MSMEs for making an investment of Rs.25 crore within three years instead of one year. That way many more MSMEs would be able to meet the criteria and avail themselves of this allowance.
Credit at low cost need of the hour Third, access to finance remains a challenge for MSMEs. Setting up a committee to examine the financial architecture of MSMEs is welcome; however, what is required is concrete recommendations for faster availability of credit at low cost. For example, the committee could look at introducing rebated income tax for small start-up businesses. Tax benefits could be further defined for a specified rebate proportion and specific period to give the requisite impetus to the sector.
Fourth, issues related to service tax for MSMEs are yet to be resolved. For instance, an increase in the threshold limit for levy of service tax is desirable. The limit could be doubled to Rs.20 lakh. Besides, micro and small sectors could be exempted from the purview of service tax for rental for their office/factory/warehouse premises for their own use. This would give relief to the MSMEs and shore up their balance-sheets.
Fifth, entrepreneurship has received a fillip in the budget with the setting up of the start-up fund of Rs.200 crore for SC/ST and Rs.10,000 crore fund for equity and soft loans for SMEs as well as incubation programme that would boost entrepreneurship. However, how exactly the fund would be modelled needs to be seen and the criterion for disbursement needs to be set at the earliest.
Sixth, the proposed entrepreneurship-friendly Bankruptcy Law is a much needed breather for the industry, and will facilitate easy exit for loss-making units. The MSME Act, 2006 (Chapter VI Section 25), proposed to implement the exit policy for MSMEs within a year’s time from the enactment of the Act. As a follow-up measure, the context was taken into consideration by the then Prime Minister’s Task Force in 2010, which had proposed short-term and long-term measures to formulate the exit policy for the MSMEs.
Execution of a time-bound policy to allow MSMEs to exit would help them consolidate their businesses and deploy scarce capital in other greenfield ventures.
Seventh, start-up entrepreneurial ventures need early stage investments from angel investors and often this is a stage when there is only an idea or just a business plan before venture capitalists comes in. Section 56, by taxing such investments, is preventing start-ups from getting funding and encourages them to migrate abroad. It is further discriminatory as foreign investors are exempt.
We suggest an exemption for investments below a certain threshold, say Rs.10 crore, in a company in a financial year, by investors who are part of any recognised angel group such as NSE and SEBI. This will help generate a dynamic entrepreneurial ecosystem.
Eighth, adoption of latest technology is a challenge and an opportunity for the MSMEs. The sum of Rs.100 crore allocated to development of Technology Development Fund scheme would certainly contribute to technology adoption by MSMEs. However, effective implementation would depend on scale and speed of integration of departments and ministries at the Centre as well as State levels through e-platform.
The framework for the fund needs to be specified in detail and it is equally important to facilitate technology adoption that will enable MSMEs to align better with the global value chain though similar e-platforms.
Balanced regional development Finally, the focus on SME development in the Northeast and Jammu & Kashmir, as announced in the budget, will lead to balanced regional development, especially through better rail connectivity in the Northeast. However, it is in this region that forward and backward linkages for clusters need to be strengthened. Capacity-building of MSMEs is imperative so that linkages between clusters and neighbouring countries in supply chain are strengthened efficiently. This would require closer co-ordination between private sector, specialised agencies and the government so that benefits trickle down to smallest units that can be scaled up and aligned with global value chains.
(The author is President, FICCI-Confederation of Micro, Small and Medium Enterprises)
