2022 budget focuses on ease of doing business for MSMEs but fails to address 90% of the unorganized sector

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Ease of doing business for MSMEs: The measures proposed to revive the MSME sector in the Union budget for 2022 are based on historical experience, but they lack foundation as the latest data on the sector is lacking.

Ease of doing business for MSMEs: The Union budget for 2022 emphasizes the ease of doing business for MSMEs by introducing policy interventions aimed at boosting liquidity, reducing input costs and fostering financial inclusion by mobilizing the post office infrastructure for banking services. However, experts say these measures are limited in scope, focusing only on the formal sector while 90% of MSMEs are in the informal economy.

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In the 2022 Union Budget, the Finance Minister announced the extension of the Emergency Credit Line Guarantee Scheme (ECLGS) for one year, until March 2023, with an increase in its corpus of Rs 50,000 crore to Rs 5 lakh crore. An additional allocation is also set aside for hospitality and related industries. In addition, expenditures from the Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE) is increased to touch 2,00,000 crores of MSMEs. “With these policy announcements, the budget addressed current issues in the MSME ecosystem, giving new impetus to the lending ecosystem to lend to and empower MSMEs,” said Alok Mittal, co-founder and CEO of ‘Indifi Technologies.

The budget also announced several corrective measures for the MSME sector, in particular to make the conditions of critical factors competitive, such as reducing the costs of raw materials and inputs. “Reducing import tariffs on inputs and raising or imposing tariffs on finished products will help ensure a level playing field and some degree of protection for domestic industries. For example, we have reduced customs duties and exemptions on inputs such as scrap steel, while levying a 7% duty on finished capital goods,” Padmanand V, Partner, Grant Thornton Bharat told Financial Express Online. Notably, sectors such as textiles, leather products and handicrafts stand to benefit from reduced import tariffs facilitating competitive global sourcing of inputs, he added.

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In addition to tax measures, there is a sustained push towards digitization. It is proposed to link several portals including Udyam, e-Shram for MSMEs and use them for further facilitation e.g. credit granting, opportunity sharing, skills etc. on B2B and D2C channels. “Currently, all these portals are managed and hosted by different ministries. The integration will allow MSMEs to obtain all required information from a single platform regarding registration, labor protection schemes, associated supply-side compliances and access to new sellers, markets on the demand side, making it easier to conduct business, Mohammad Athar (Saif), partner and head of industry development at PwC India, told Financial Express Online.

Failures

Despite the many initiatives announced for MSMEs in the 2022 budget, most of the policy announcements are a continuation of existing government efforts and do not go beyond the sector’s concerns about the injection of capital.

Many MSME units are still not making a profit, so benefits to directly help them run the business would have gone a long way in getting the sector back on its feet.

“I was hoping for measures that fund job creation given the sharp rise in unemployment during the pandemic. The government could have offered SME owners a share of their wage costs so they don’t cut staff for reduce their operating costs,” Dr. Partha Chatterjee, Professor and Head of Department of Economics, Shiv Nadar University, Delhi-NCR, told Financial Express Online. Creative Ways to Save the Economy of Small Businesses could have been introduced, like an asset purchase program.

Even judicial reforms aimed at stimulating economic activity are not mentioned in the budget. “Commercial disputes take years to resolve due to archaic processes and understaffing in Indian courts. We were hoping for the introduction of digital measures to enable easy tracking of court cases and their resolution within a limited time, Anil Bhardwaj, Secretary General of the Federation of Indian Micro, Small and Medium Enterprises (FISME) told Financial Express Online.

Furthermore, the Insolvency and Bankruptcy Code only covers private enterprises and does not include sole proprietorships where more than 90% of MSMEs are owned by promoters. “These points have always been the main pain points in the ease of doing business surveys,” Bhardwaj added.

However, the elephant in the room is that the budget only focuses on registered MSMEs which only represent 10% of the sector. “The unorganized sector has been heavily affected by the pandemic and no one, including government officials, knows the latest state due to the lack of national data on MSMEs in the country,” said MH Bala Subrahmanya, Professor at the Department studied management at Indian Institute of Science, Bangalore. He added that the proposed measures are based on historical experience but lack foundation as the latest data on the sector is lacking. “It is high time for the government to announce a systematic statistical sample survey before proposing corrective measures,” he said. For example, the Japanese economy annually publishes a white paper on the SME economy detailing its innovation index, investments made, jobs generated, among others.

While the budget recognizes MSMEs as key drivers of growth and jobs in the country, holistic measures to revitalize the sector have fallen through the cracks.

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