Keep working (for) capital

Union Budget 2017 has not been able to address the problems faced by MSMEs, which are struggling to cope with the post-demonetisation drop in demand and unavailability of working capital to resolve their cash flow issues.

SMEs form the backbone of India, contributing to about 8 percent of the GDP, 45 percent of the total manufacturing output, and employing close to 40 percent of the country’s workforce. In spite of this, they have been riddled with a number of critical issues such as inadequate infrastructure, lack of access to financing options, unavailability of skilled resources, and risk perception. India is ranked 130^th out of 190 countries in the ease of doing business index released by the World Bank.

Furthermore, things have never been so difficult for SMEs — they are suffering from the double whammy of a cash crunch and demand squeeze in the wake of demonetisation. Financial institutions have become even more reluctant to extend credit to these businesses. The demonetisation drive witnessed a 35 percent layoff with a revenue dip of 50 percent in the month after November 8, 2016.

However, the PM’s speech on December 31, 2016, did mention some positives:

1. Enhancement of limit under the credit guarantee scheme for small businesses (CGTMSE) from Rs 1 crore to Rs 2 crore and inclusion of NBFCs in the same.
2. Enhancement of cash credit limit for small businesses from 20 to 25 percent of the turnover.
3. Additional small tax benefits to businesses based on their usage of the digital payments infrastructure.

Actually, if you look at the CGTMSE scheme carefully, it has given guarantees many times but its available corpus and claim settlement are plagued by inordinate delays, so increasing the limit would hardly make things better for small businesses. Even enhancement of the maximum cash credit limit is of little use as SMEs are the least preferred lot for financial institutions. Therefore, benefits announced by the government appear to be superficial.

Now, let’s look at what has been done for the SMEs in the current Budget:

• Reduced income tax: Proposal to reduce the income tax from 30 percent to 25 percent for businesses with turnover of up to Rs 50 crore. This is a welcome step that will benefit around 96 percent of the small businesses in India which, in turn, would give them some respite in competing with large players.
• Proposal to amend NI Act: The government is considering an option to amend the Negotiable Instruments Act to provide relief to receivers of dud cheques and expedite the settlement process. If implemented, this will improve the collections process and might act as a deterrent for the borrowers.
• Reduced tax liability of banks with regard to non-performing assets (NPAs): Increase in capital set aside for NPAs that can be deducted from the gross income of the bank from 7.5 percent to 8 percent. This should benefit the financial institutions and might free some capital for more disbursals.
• Limit on cash transactions/introduction of 10 lakh POS machines: No cash transactions above Rs 3 lakh and 10 lakh additional point of sale (PoS) machines will go a long way in reducing SMEs’ dependence on cash and will set the right precedent for a cashless future.
• Greenfield enterprises: Priority to be given to tribals, Dalits, and women to set up greenfield enterprises, which is a good step to give the country’s underprivileged equal opportunities.
• Surplus liquidity: The enhanced liquidity created by demonetisation in the banking system will lower borrowing cost and increase access to credit for all SMEs.
• MUDRA’s lending target doubled from Rs 1.22 lakh crore in 2015-16 to Rs 2.44 lakh crore in 2017-18. This will enhance growth in the lower rung of the business strata and reduce unemployment.
• Tax exemption for manufacturers of POS machines: Mini POS, micro POS, and fingerprint and iris systems for cashless transactions to make digital payments easy and manufacturers will receive tax exemption.
• Availability of skilled resources: Allocation of Rs 4,000 crore for skill acquisition programmes to increase the availability of skilled resources for the companies on ground and reduce unemployment.

The year 2016 will be remembered as the year of boldness and unprecedented moves like demonetisation and passage of the GST Bill by the Central government. These two events alone will transmogrify the SME landscape in India and will displace the cash-heavy economy to a more digital-savvy and compliant one.

To summarise, we laud the efforts of the government for moving from a blanket entitlement towards targeted delivery and rigorously supporting the digital revolution in this mammoth democracy famous for its on-ground heterogeneity.

However, there are some expectations that have not been met:

• Easing of capital availability for SMEs either through tweaking the percentage of adjusted net bank credit in priority sector lending or through some short-term reforms to provide quick fixes for loans to SMEs.
• Improvement in infrastructure for small manufacturing units in tier 2 and tier 3 cities so that they can churn out cost-effective products and compete with industry biggies.
• Post demonetisation, SMEs saw the biggest impact in their top line and bottom line but unlike bigger corporates, they can neither borrow at a lower rate nor raise the prices of their products. There should have been some reforms to pass on the benefit of the windfall gain in deposits by the banks post demonetisation.

With such a heavy stake in the country’s GDP, no substantial growth in the economy is possible unless the SME sector is strong.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)