Friday, February 23, 2024

Union Budget: A minority report

The finance minister has promised a Budget like “never before” but issues at hand, especially the health of MSMEs, are so critical and government resources so constrained that such a wide promise may be difficult to fulfil.

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By Sujit Bhar

The Union Budget this time will be Finance Minister Nirmala Sitharaman’s toughest so far. In fact, it will be the toughest for any finance minister, since Dr Manmohan Singh’s historic budget of 1991 when the PV Narasimha Rao government decided to open up the Indian economy and pledge gold from the treasury and save the country from a major balance of payment crisis. The finance minister has promised a budget like “never before”, but issues at hand are so critical and government resources so constrained that such a wide promise may be difficult to fulfil.

Amid the huge gamut of problems are two special and interconnected issues that need immediate attention. They are employment and the entire Micro, Small and Medium Enterprises (MSME) sector. Both are at historic lows, with much of the small industry euphemistically, the unorganised sector—near total destruction. These are issues that also reflect prominently in the political mirror.

The suffering of common folk, especially looking ahead to election time in Assam and West Bengal—the second one being touted as BJP’s “final frontier”—should be foremost on the finance minister’s mind. Even a cursory study of current situations would bring into the limelight the plight of the MSME sector, which is the largest employer of the country, after agriculture.

India’s MSMEs were severely constrained even before the pandemic. The demand and supply sides had dipped precariously and, coupled with delayed payments and banks showing closed fists, liquidity dried up. Then came the corona pandemic, and all came crashing down.

As Mukesh Mohan Gupta, President, Chamber of Indian Micro, Small and Medium Enterprises, pointed out: “You must understand that the entire sector is reeling under delayed payment issues. Remember, delayed payments completely destroy the value of a transaction. When you get paid late, so many other expenses are already lined up that you completely lose the advantage.”


FM Sitharaman did announce a Rs 3 lakh crore rescue package for this sector during the pandemic, but the effects of the package reached a very small portion of the sector. There are between 90 lakh and 1 crore registered MSMEs, but there are over 6 crore other MSMEs, which are unregistered and they are not eligible.

When an MSME owner approaches a bank for relief through a special loan, he/she is clearly told by the bank that the application would be looked into only if the MSME is registered and also has a running loan account with the bank. This outlandish demand by bankers has discouraged most of the struggling MSMEs who cannot provide any level of collateral. Bankers today are scared that any loan they sanction could turn out to be an NPA. It is immaterial that banks themselves had piled loan upon thinly secured loan on major business houses, throwing caution to the wind. That is the primary reason for the humongous NPAs that brought banks to their knees.

Further explaining this issue of non-registration, Sanjoy Banerjee financial analyst and former executive director at ICRA, added a critical reason. He said: “Yes, there are a lot of benefits of registering (as an MSME), but as soon as you register, there comes the question of compliance. Compliance isn’t a bad thing, and small unit owners wouldn’t really mind, if it not for the huge complications involved in this and the time wasted.”

According to him, a non-registered firm would possibly have a lot more elbow room to work in and freedom to change track when the going gets tough on one route. These are issues that need to be looked into by the FM while she tweaks the ease of doing business parameters.


The entire issue has been clearly analysed by Dr E A S Sarma, former secretary in the Ministry of Finance and the Department of Economic Affairs, a scholar and social activist. He believes that the budget must address the small, marginal entrepreneur, suffering from way back when demonetisation struck. He tells the story of a small innovator who lost everything. Because the financial system of the country is geared to mainly address the problems of much larger units.

Says he, that this “innovator, who set up a low-cost solar device unit in Hyderabad, lost his liquidity as a result of demonetisation. All his vendors and workers were marginal ones and cash payments were an essential part of his business. When demonetisation disrupted his business, the bank that gave him loan assistance attached his unit along with the land, cutting off any possibility of his reviving the unit. This unit used to work with Ramakrishna Mission and my own network of civil society organisations to propagate the use of solar lighting devices in the slums and the tribal villages. The unit trained a few youth in repair and maintenance of solar devices. Such a socially beneficial unit had to wind up in the absence of any debt restructuring facility usually extended by the banks to big corporate houses.”

He said that the micro segment of the MSME sector is so vulnerable to sudden changes in the ecosphere that they are simply wiped out, without any recourse to sustenance.

The Visakhapatnam-based Sarma wrote to Finance Minister Sitharaman last October, regarding the problems faced by small businesses in repaying loans “taken from NBFCs as a result of the lockdown restrictions and the fall in demand for services, an inevitable consequence of the COVID19 crisis…”

He says in the letter: “The NBFCs are pressing the small business owners to repay the loans with interest and they are resorting to extra-Constitutional means to intimidate the small businesses into parting with their meagre assets. In my earlier letter, I had pointed out one instance of a taxi car owner committing suicide in Andhra Pradesh. If your Ministry and RBI do not intervene, I am afraid there will be many more such cases.

“Your Ministry is prepared to go to the rescue of big businesses and ask the financial institutions to allow them to restructure the defaulted loans but, when it comes to the small enterprises, no such benevolence seems to be forthcoming.” The loan repayment deferment ordered by the Supreme Court was a great move, but was possibly too little, too late. It could barely scratch the surface of this massive problem.


For FM Sitharaman, there are also some populist reasons for paying special attention to MSMEs. First is the health of the sector. It has been estimated that up to 20 percent of all MSMEs—especially in the micro section, which comprises over 99 percent of all MSMEs—have been so devastated that recovery seems impossible. With them have permanently disappeared jobs of thousands, if not lakhs of people.

Second is the pre-eminent position of MSMEs in the country. With the recent change in definition of micro, small and medium enterprises, India has actually turned into a country of small businesses, with nearly 99 percent of all entities now falling under the category based on the twin parameters of investment and turnover.

And third is the issue of impending elections. West Bengal, where elections are due in late April or May, is said to be the “final frontier” of the BJP government, and this is a state which has 14 percent of all MSMEs in the country second, after Uttar Pradesh, which has 14.2 percent which means that employment is also proportionately at that level. A promise of extra employment for West Bengal has to incorporate the MSME sector, the largest commercial employer.

What are the immediate problems of the sector that the Budget needs to address? There seems to be some repair on the demand side, with a possible V- shaped recovery taking shape, the economy pushing up from a deep hole. The economic survey predicts an 11-plus percentage point growth, which is good, but, as orders start trickling in, the MSME sector seems unprepared to address that, because they lack the liquidity needed for raw material purchase and for operational cost. They also have a massive manpower problem. It has to be remembered that during the lockdown, when the factories and offices were shut down, while all opportunities vanished in the blink of an eye, the expense side in labour costs, electricity charges, raw material cost, taxes and contingencies remained undiminished. It was disaster with a capital D.

The MSME employment scenario is massive. The registered ones, in themselves, account for almost 12 crore employees. These figures are from before the pandemic struck. The total workforce of the entire country is over 62 crore (this is an accounted for figure, including agriculture), which means that the registered MSMEs alone account for about a fifth of that. Considering all employed in industry and commerce, MSME workforce participation will reach a massive level.


However, while MSMEs contribute around 29 percent of India’s GDP as per 2020 accountings active governmental support to them (pre-pandemic), whether through infra or finance or through low value bill discounting this is considering the massive levels of delayed payments has been minimal. Complex GST issues have only added to the problem.

Gupta adds:  “There is an urgent need to simplify the taxation method. There has to be a different system for MSMEs, at least for the post-Covid recovery period. It is difficult for the owner of a small organisation, where he/she is the CEO and the sales head and the shop floor supervisor all at the same time, to find time to go through the complexities of the taxation system and comply in time.”

On paper, the numbers look pretty impressive. As of the end of FY 2019, banks and NBFCs had about Rs 17.4 lakh crore outstanding to MSMEs. This is actually a mirage. On the ground, banks today simply refuse to get involved with MSMEs, especially the micro and small segments of the sector. Mudra loans are somewhat applicable, but the overall NPA in Mudra loans have also grown to huge proportions.

The finance minister, in this Budget, should not just have a “package” for these units. The government should engage in active handholding them through these tough times. There should be schemes for confidence building and banks should be sensitised towards cheap financing.

This is a priority sector. If nourished, this is the sector that yields political gains for the government at the centre and can bounce back to at least its pre-pandemic stage, where it held 48 percent share in India’s exports. No economy has risen to any great heights merely on the shoulders of domestic consumption. And with several more sectors, including defence, being opened up for private participation, MSMEs can have the option of competing and scaling up. Here is where they need total government support.

As Banerjee adds: “MSMEs are the lifeblood of any nation. India is no different. The employment volume that this sector can produce is huge, so it is essential that this sector receives some extra attention, especially to help it come out of the devastation of the pre-Covid slowdown and the destruction wreaked by the pandemic and resultant lockdown.”


The system is not tailored to assist MSMEs, says Banerjee, who has had immense experience in this area. He feels that the sector needs to be treated with respect and care. “I suggest a special bank only for the MSMEs, he says. The general banks are not capable of understanding the myriad and unique problems of this sector. Unless the problem is properly understood, one cannot arrive at a solution. And the current system cannot do that.”

The government had announced several schemes for the MSMEs, such as the Subordinate Debt Scheme and the Funds of Fund scheme, etc. However, these can only come about in new or evolving MSMEs, and mostly in the small and medium segment of the sector. More importantly, the unit has to come back to pre-pandemic levels first, to be able to absorb government largesse in these categories of help. That is the immediate job of the government and the finance minister. That is what can make these budget proposals impressive.

Subordinate Debt Scheme: This involves government help in promoters’ equity funding. Through this debt scheme the government takes up to 15 percent of the promoter contribution or Rs 75 lakh, whichever is lower. The government will stand guarantee for bank loans under this, the idea being to in­crease liquidity. There is a small problem in this. Few promoters would want to infuse new monies now, in the absence of a solid and guaranteed future scenario.

Funds of Fund: This probably has a somewhat better chance of success. It is a Rs 10,000 crore corpus for financial relief to MSMEs with growth potential and viability. This is being called an initial corpus, of Mother Fund, leading a possible further infusion of Rs 50,000 Daughter Funds. Viability, however, is the catch phrase attached, which may leave out a large number of MSMEs.

Champions Portal Objective: A new portal entirely dedicated to the MSME sector. The objective is to help MSMEs in finance, raw materials, labour, permissions, etc. This has promise, but being in the government sphere, it will surely have implementation lacunae. Possibly the only positive step taken by the finance minister so far has been the nudge to PSUs to expedite all pending payments. A 45-day window is decent enough.

The entire scenario is balanced on delicate handling of this sector. It is a matter of political and fiscal prudence. The Budget will not be easy.

MSMEs: Issues at hand

1. The Budget comes just over three months before big-time elections in Assam and West Bengal. For West Bengal, the issue is also of businesses washed away in the Amphan super cyclone. These are political imperatives.

2. Before Covid-19 struck, the number of registered MSMEs were around 90 lakh to 1 crore. But there were another nearly six crore unregistered organisations in a similar financial bracket.

3. The economic slowdown before Covid-19 and the massive impact of the lockdowns have virtually destroyed 20 percent of the entire strength of India’s MSME sector. Alongside a huge section of employees also lost jobs.

4. The condition of the remaining 80 percent is as bad.

5. Need end-to-end government hand-holding of MSMEs.

6. Only the registered MSMEs employ over 12 crore people. That is a fifth of the total Indian workforce of 62 crore, including unregistered MSMEs. This figure will climb to 70 percent within the industry and commerce sector.

7. As far as the MSME sector is considered, the government should actually consider this situation an opportunity, rather than a problem.

8. The Pradhan Mantri Atmanirbhar Bharat programme will bear fruit through increase in the manufacturing segment of the MSMEs.

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