Government has unveiled a series of initiatives in the Budget 2024-25 to impel MSMEs towards skilling and boosting employment in the manufacturing sector & MSME industry and enhancing the participation of women in the workforce
The Union Budget 2024-25 presented by the Narendra Modi government at the beginning of its third term, has laid a solid foundation for enabling a robust ecosystem for micro, small, and medium enterprises by the end of this third term. This budget has also reinforced the position of the MSME sector as a key player in achieving the target of a GDP of $5 trillion in the next three years.
The government has introduced a multifaceted approach to address the unique challenges of MSMEs and unlock opportunities for this crucial driver of economic growth and employment, employing approximately 113 million people, or about 40 percent of the country's workforce.
Cyclic and irregular cash flows, working capital stuck in TAX, TCS, TDS, and GST payments, delayed payments of invoices and the unavailability of collateral for growth capital, lack of access to finance, the complex regulatory landscape surrounding digital services, and the imminent threat of NPA have all formed the deathly hurdles of the business finance challenge track, which most MSMEs need to cross to survive, but few are able to.
The government has faced an unexpected backlash from certain groups of MSMEs backed by hidden players on enforcing Section 43B(h) of the Income Tax Act, something that is actually in line with the basic preamble of the MSMED Act of 2006, of ensuring invoices and dues of MSMEs are paid in less than 45 days, but something that has always been circumvented and never enforced, while the age-old business mechanism “Payable When Able” has continued to rule in the business mainland for MSMEs. Retaining Section 43B(h) of the Income Tax Act and further editing the Ministry of Corporate Affairs' (MCA) rule requiring large enterprises engaging with MSMEs to file the detailed version of the MSME1 form twice a year, with full details of the dealings with MSMEs, deserves a standing ovation for reinforcing the government’s commitment to mitigating delayed payments, a critical issue for many small businesses.
Additionally, the announcement that banks will spearhead the development of a new credit assessment model based on the digital footprints of MSMEs, moving beyond traditional asset or turnover criteria, is a particularly positive step for this industry, which is already facing a credit gap estimated to be around USD 530 billion in the digital age.
The India SME Forum has been consistently vocal about the creation of a Stressed Assets Recapitalisation Fund for MSEs, repurposing and rephrasing the Distressed Assets Funds, the Fund of Funds scheme, and other programmes that can cover the provisioning to be made by banks for sub-standard NPAs. While in Special Mention Account (SMA) status, MSMEs will have access to credit backed by a government-promoted guarantee fund, helping them avoid slipping into non-performing asset (NPA) status. Addressing this issue of SMA to NPA for the long-term health and success of MSME businesses, this mechanism to support MSMEs during stressful periods will prove to be very important.
Credit availability has been further eased for Micro Enterprises through one of the most successful and far-reaching government schemes, MUDRA Loans. For entrepreneurs who have successfully repaid previous Mudra Loans under the Tarun category, the loan limit has been doubled from Rs. 10 lakhs to Rs. 20 lakhs, providing greater financial flexibility for business expansion to those at the bottom of the MSME pyramid. Growth capital, which is always in short supply with MSMEs, will now get a huge fillip with loans available without collateral for upgrading machinery and automatic manufacturing lines. Coupled with this, the Small Industries Development Bank of India (SIDBI), the primary financial institution for the MSME sector, is set to expand its network with 24 new branches opening this year itself, taking its reach to 168 out of 242 major MSME clusters across the country.
The Trade Receivables Discounting System (TReDS) platform in India has seen significant growth in recent years, with a 55 percent increase in total bills financed from around Rs 75,000 crore in 2022 to Rs 1.16 lakh crore in 2023. However, it was mandatory only for companies with a turnover higher than Rs 500 crore to onboard the TReDS platform. This budget has also proposed reducing the turnover threshold for mandatory onboarding on the Trade Receivables Discounting System (TReDS) platform from Rs. 500 crores to Rs. 250 crores.
This change is expected to bring 22 more CPSCs and 7,000 additional companies onto the platform, significantly expanding the scope for MSMEs to unlock working capital by converting trade receivables into cash. More importantly, medium enterprises, apart from the existing micro and small ones, will also now be included as eligible suppliers on the platform to further mitigate the issue of access to finance. Moreover, a GST-TReDS-GeM interlinked DPI to simplify the process will ease the cash flow and restrain delayed payments for MSMEs. The reduction of TDS rates for e-commerce operators from 1 percent to 0.1 percent is another welcome step that will ease the cash flow burden on small online sellers.
The announcement of a comprehensive review of the Income Tax Act 1961 and simplifying the GST system to make it more concise and easier to understand, to reduce disputes, and to provide tax certainty to MSMEs. This foundation laid by the government to relieve MSMEs of financial stress is really commendable. However, in order to achieve the target of a $5 trillion economy, the government needs to bring all the enterprises under the ambit of the Goods and Services Tax (GST) regime, even if their turnover is less than Rs. 40 lakhs (for goods) and Rs. 20 lakhs (for services), which are currently not required to register for GST.
By mandating GST registration for all and recording all transactions, the government can create a complete digital record of their financial activities. This data can also be used as a reliable source by lenders to assess the creditworthiness of these businesses, allowing them to obtain financing.
To make sure all enterprises register for GST, India should draw inspiration from China’s model of levying only 1 percent GST on micro sized MSMEs initially. Moreover, taking inspiration from the UK, US, Germany, EU, & UAE, introducing a regulatory framework for equity as well as debt-based crowdfunding and peer-to-peer (P2P) lending can also contribute towards achieving the target of access to finance for every MSME.
The government plans to develop Digital Public Infrastructure (DPI) and integrate these applications across various sectors. DPI applications planned to be developed for MSMEs for GST, regulatory compliance, and return filing will ease compliance and the process of book-keeping for Micro enterprises.
The increasing cost of land in India has become a significant obstacle for MSMEs, severely impacting their ability to establish and expand their business operations. This trend is particularly pronounced in major industrial hubs and metropolitan areas, where MSMEs often need to locate to access markets, skilled labour, and essential infrastructure. But while land is unaffordable and no banks offer loans for buying plots, building a factory is a big task.
MSMEs often struggle due to a lack of accessible and affordable testing facilities, hindering their ability to meet industry standards and customer expectations. Recognising the challenges faced by MSMEs, the government has announced numerous plans to mitigate these challenges. The FM announced the development of "plug and play" industrial parks, which will be established in or near 100 cities across India. These parks are designed to be investment-ready, featuring complete infrastructure to facilitate industrial investments and boost economic activity. The "plug and play" concept is intended to simplify the process for businesses to set up operations. To further enhance the competitiveness and resilience of MSMEs, the government needs to develop at least 1000 industrial parks to help set up at least 35-40 lakh new MSME over the next 4 years for constant economic growth.
The government is placing focus on developing a quality and testing facility infrastructure that puts India on par with global standards. This in turn will also give a boost to small enterprises through easy and varied access to product quality testing labs. Financial support will be provided for setting up 50 multi-product food eradication units and 100 food quality and safety testing labs with NABL accreditation. Moreover, setting up Common Facilities Centres (CFCs) with uninterrupted power and a network of testing labs all over the country and making testing & certifications mandatory would ensure good quality production from MSMEs.
For MSMEs in traditional sectors, the government will facilitate an investment-grade energy audit in 60 clusters, including brass and ceramic industries. Financial support will be extended to help these industries shift to cleaner energy sources and implement energy efficiency measures.
MSMEs also lack access to global markets, as currently, India's e-commerce exports are estimated at around USD 5 billion, accounting for only 0.5 percent of the total merchandise exports and a mere 0.25 percent of global B2C e-commerce exports. This stark contrast highlights the underutilisation of e-commerce as a channel for MSME exports compared to other countries like China, where MSMEs export over USD 300 billion through cross border e-commerce platforms.
The government had previously set a target of achieving USD 2 trillion in export revenue by 2030, and with the budget move to boost e-commerce exports, the government plans to set up e-commerce export hubs in public-private partnership mode. The government has laid out a red carpet to give a push to e-commerce exports, but the government needs to create a fund to initiate a comprehensive programme aimed at identifying, strengthening, promoting, and popularising Indian GI goods on a global scale while starting out with at least 200 flagship Indian GI products.
The government has unveiled a series of initiatives in the Budget 2024-25 to impel MSMEs towards skilling and boosting employment in the manufacturing sector & MSME industry and enhancing the participation of women in the workforce. In a significant move to promote job creation, the government will provide incentives to employers for the first four years of employment, providing MSMEs with an opportunity to employ young individuals for their growing enterprises. This includes a reimbursement of up to INR 3,000 per month for each additional employee hired. Udyam registered MSMEs numbering around 40 million enterprises currently provide employment to approximately 113 million individuals. There exists substantial potential for job creation among sustainable MSMEs. Out of the Udyam registered MSMEs, if only 50 percent, or 20 million, would be incentivised to hire just two additional apprentices and employees, the government could generate employment for an additional 80 million people.
In the Union Budget 2024-25, the government also announced plans to revamp the Shram Suvidha and SAMADHAN portals to enhance compliance for industry and trade. The Shram Suvidha Portal, which allots unique Labour Identification Numbers (LINs) to inspectable units and facilitates online registration and filing of consolidated returns, will be improved to make it easier for businesses to adhere to labour laws and regulations. These initiatives are part of the government's broader strategy to support industries, reduce compliance burdens, and foster a conducive environment for business operations, particularly for the MSME sector. By integrating these portals with other labour-related services, the government aims to streamline processes and improve the ease of doing business in India.
Majority of the budget initiatives introduced by the government are admirable due to a special focus on the MSME sector. The government has demonstrated a clear commitment to fostering MSME growth through a combination of financial support, digital integration, skill development, and regulatory easing. By addressing key pain points and creating new opportunities, these measures are poised to enhance the competitiveness and resilience of India's MSME sector. As these initiatives take shape, they are likely to contribute significantly to job creation, innovation, and overall economic growth in the coming years.
(Vinod Kumar is President, India SME Forum)