Industry wants Budget to bring better credit schemes, GST rationalisation and lower cost of capital for MSMEs

Access to finance continues to remain one of the most pressing issues for micro, small and medium enterprises (MSMEs). For the 63 million MSMEs in India that contribute approximately 45% to the country’s manufacturing output and 40% to exports, making finance more accessible is key to creating a more amenable ecosystem.

The World Bank pegs the current MSME credit gap in India at a whopping $380 billion. What can Budget 2022 do to ease the financial woes of the sector that act as a deterrent to its true potential?

Sudarshan Chari, Head-Business Banking, DBS Bank India, lists an increase in the budgetary outlay for the sector, simplifying taxation and focused schemes as some of the key expectations from the Budget. “The finance minister may consider establishing a capital access fund with nodal agencies like SIDBI, which will allow for equity participation in new capex projects. We can expect an announcement about extending the Emergency Credit Line Guarantee Scheme (ECLGS) beyond March 31, 2022, to address rising cash flow challenges in the operating cycle and prolonged lead times due to supply chain bottlenecks,” he says.



DBS helps MSMEs with services such as business loans, payments and collections, remittances and forex solutions.

The sector has always felt resource crunch. The situation worsened because of the pandemic. Lockdowns forced units to down shutters though the promoters still had to pay a number of fixed expenses. This wreaked havoc on small businesses.

Akash Gehani, COO & Co-founder, Instamojo, says a complete halt in business activity made it difficult for the MSMEs to service their obligations. Many had to close shop permanently. A LocalCircles survey last year had stated that at least 59% of startups and small companies were likely to shut, scale down or be sold due to the harsh impact of the Covid-19 pandemic.

In the Budget, Gehani says, the government should consider addressing the credit gap challenge through GST rationalisation and by reducing compliance burden for ease of doing business. “The government should introduce initiatives to manage existing credit by regulatory sandboxes, compliance burden reductions and also introducing more incubation programmes,” he adds.

Industry experts are of the view that the Budget should address the challenges by improving the sources of financing available for the sector.

Pallavi Shrivastava, Co-Founder & Director of Progcap, which offers financing solutions for SMBs, says the immediate requirement is to provide a lower cost of capital to fund MSMEs’ business continuity needs. “Increasing the ambit of priority sector lending network to cover trading MSMEs, helping them borrow at a competitive rate; rationalisation of tax liabilities to enable more capital inflow in helping them improve the business process, geographical expansion; and extending credit guarantee schemes for the trading MSMEs thus far excluded from policies/incentive schemes will be the need of the hour,” she says.

At least 30% of the financial inclusion budget should be allocated to the MSME sector, given that it accounts for roughly the same contribution to GDP, Shrivastava says. Impetus through innovative credit schemes and an R&D input credit scheme to boost innovation among them are some of the other measures she suggests for upliftment of the small businesses.

But not just financial incentives, the sector also needs to be cushioned from the impact of such a crisis in the times to come. Long-term measures and policies that can build resilience for such enterprises will prove crucial to their survival and sustenance.

Ram Iyer, Founder and CEO, Vayana Network, outlines some aspects that can foster an environment that is comfortable and enabling for each stakeholder. “Ease of doing business should be put into practice with uniform laws across states. Besides this, simplifying GST rules, undertaking initiatives to enable cluster-based access to affordable credit and fortifying state-based MSME support facilitation centres will all be steps in the right direction for the sector,” he says.

Iyer adds that while these may be outside the immediate scope of a Budget statement, such measures can be the guiding force of the policy to protect small businesses from external factors threatening its survival.

India’s success and growth as an economy will depend a lot on how its MSMEs prosper. No lofty economic goal can be achieved if small enterprises – the proverbial backbone of the Indian economy – are left to fend for themselves.

Source::: THE ECONOMIC TIMES,  dated 31/01/2022.