How Union Budget 2024 Can Boost India's MSMEs

Over the last few decades, the Micro, Small and Medium Enterprises (MSME) sector has become an integral part of the Indian economy, contributing more than 29 per cent to the country’s GDP. Recent budgets have introduced various policies, incentives and support schemes to boost the performance of MSMEs, such as providing access to credit facilities, offering subsidies and overall ease of doing business.

In the Interim Budget for 2024 presented on 01 February, the Hon’ble Finance Minister announced the government’s sharp focus on bolstering MSMEs, the backbone of the Indian economy, through timely and adequate finances, relevant technologies and appropriate training to grow and compete on global platforms.

MSMEs have played a crucial role in providing employment opportunities at comparatively lower capital costs, helped in the industrialization of rural and backward areas, thereby, reducing regional imbalances and assuring more equitable distribution of income and wealth. However, some practical challenges faced by the MSMEs are yet to be addressed. The Finance Minister chaired the pre-budget consultation with the Federation of MSMEs, wherein certain issues have been discussed. It is hoped that the upcoming Budget would take a pragmatic step towards bridging the identified gaps in the MSME sector.

Raising capital

According to the Special Mention Accounts (SMA) framework outlined in the Reserve Bank of India's policy on non-performing asset classification, banks must categorize accounts with an exposure of Rs 50 million into three distinct categories. The first category, SMA-0, includes accounts that exhibit signs of incipient stress even if the principal or interest is not overdue for more than 30 days. The second category, SMA-1, encompasses accounts where the principal or interest payment is overdue for 31 to 60 days. Finally, the third category, SMA-2, applies to accounts with principal or interest payments overdue for 61 to 180 days.

Once an account is figured in SMA, the account becomes a pariah, bringing even normal banking operations to halt. Accordingly, considering the working capital cycle, liberalisation of the SMA framework in the upcoming Budget would have a positive impact on fund raising and on ease of doing business.

Simplification of the taxation regime

In the interim Budget 2024, the taxation regime remained unaltered. To simplify the scheme of taxation for small businesses, provisions of presumptive taxation were introduced under the income-tax laws, pursuant to which any taxpayer whose turnover does not exceed INR 20 mn (subject to satisfaction of certain conditions, the above threshold limit is increased to INR 30 mn) is neither required to maintain full-fledged books of account nor get the same audited.

It is worthwhile to note that as per extant MSME regulations, a micro enterprise has been defined to mean an enterprise with a turnover of Rs 50 million. In the upcoming Budget, increase in the threshold limit under the presumptive taxation to Rs 50 million would reduce the compliance burden on the MSME sector.

De-risking of credit inflows to MSMEs and incentives to fintech

The MSMEs have the potential to fuel the Indian economy. However, as per reports, the estimated credit gap is approx. INR 25 lakh crore. This is because the credit rating agencies were mandated to rate MSMEs for short-term solvency with the same yardsticks used to rate listed entities. Consequentially, hardly any MSMEs were able to score investment grade rating thereby resulting into higher interest rates and demand for additional security.

However, recent trends show that fintech is bridging the gap by offering tailored solutions for improved access to credit vis-à-vis flexible terms, lower interest rates, loans without collateral, etc. Fintech companies leverage technology to offer tailored financial products and services such as digital lending platforms, mobile payment systems, invoice financing, supply chain financing, etc.

The gravity of fintech space in empowering MSMEs is worthwhile and accordingly, granting appropriate relaxations / tax incentives to fintech companies for increasing their portfolio in the MSME sector would act as breakthrough for the MSMEs.

Competitiveness of MSMEs

The Hon’ble Finance Minister, in the Interim Budget, had announced that a corpus of INR 1 lakh crore will be established with 50-year interest -free loan. This will result into long-term financing or refinancing with long tenors at low or nil interest rates and encourage the private sector to scale up research and innovation significantly in sunrise domains. While the government has acknowledged MSMEs as cornerstones of the economy for sustainable global competitiveness, however, enhancing the competitiveness of the MSMEs is crucial to align with the ‘Panchamrit’ goals.

To boost innovation and digitization of MSMEs, to make them globally competitive, a welcome move in the upcoming Budget would be to offer one-time special tax incentives / allowances for investments in technology-related services for MSMEs and inhouse research and development. Such incentives would have a domino effect with more businesses being encouraged to make the digital transformation.

It is crucial to acknowledge the role of MSMEs in achieving the vision of ‘Viksit Bharat’ considering that the sector contributes more than 29 per cent to the country’s GDP. The policies discussed above would have a positive impact on the sector fostering its growth and sustainability which would be pivotal in helping India achieve its dream of becoming a US$ 5 trillion economy.

(The author is Partner at Deloitte India.)

(The views belong solely to the author.)