In India, Micro, Small and Medium Enterprises (MSMEs) are viewed as an engine for economic growth. They play an important role in providing more employment opportunities as well as in developing rural areas. This is because the MSME sector takes second place in generating employment for semi-skilled and unskilled labor after the agriculture sector. It is estimated that India has a 7.9 million Micro, Small and Medium Enterprises base, and the sector contributes to about 33% of the country’s GDP.
However, despite their increasing importance, recent years have been tough for these enterprises to grow. Unprecedented events such as the the Covid-19 pandemic and the Russia-Ukraine war have slowed down their business. Here are the main problems impeding their growth.
Often vendors of large to medium enterprises need upfront payments to ensure timely supply of goods to their customers. The customers, on the other hand, prefer a longer credit period to pay their vendors. This gap in trade transactions often choke the supply chain, impacting both the buyer as well as the seller.
The lack of funds at the vendor end means raw material procurement for production is a challenge. If funds are not provided to them in a timely manner, their growth plans take a back seat, which subsequently hurts the enterprise business as well.
Most vendor businesses have difficulty in obtaining formal financing. They not only need technology to streamline their operations but also tech-led financing options that ensure quick disbursals of funds with minimal paperwork.
So, what is the Union Budget that can significantly ease their difficulties? Let's have a look.
This year’s budget is very supportive of the start-up ecosystem in India and has put its much-needed focus on the challenges of the MSMEs sector through the following steps:
In the 2023 Union Budget, the government has proposed to revamp the credit guarantee scheme for MSMEs which will take effect on April 1, 2023. The new scheme will see an infusion of Rs. 9000 crores in the corpus, which enable additional collateral-free guaranteed credit of Rs. 2 lakh crores. Furthermore, the cost of the credit will be reduced by about 1%.
The infusion of Rs. 9000 crore addresses the credit gap and is aimed at enhancing credit access to MSMEs in India. This will help in the growth of businesses in several ways:
- Medium to large enterprises will have greater access to credit, which they can then use to finance their operations, purchase machinery and equipment they require and expand their business.
- The increase in credit flow means they can easily benefit from lower interest rates. This will reduce the cost of capital for these businesses.
- With the availability of credit, these enterprises can think of making investments, which in turn, will drive growth and create more employment opportunities.
- MSMEs will now have access to formal credit, which means they can reduce their dependence on informal lending sources.
- Increase in credit flow can also be a motivating factor for many people to start their own businesses and contribute to the MSME sector.
The government, as per the 2023 Union Budget, has also arranged an additional loan guarantee of Rs. 2 lakh crore for MSMEs in India. This increases the limit of presumptive tax and helps MSMEs grow. To promote the growth of MSMEs, the government has proposed to extend income tax benefits to startups incorporated till March 2024.
Furthermore, Nirmala Sitharaman, Finance Minister of India, said that the government would increase the benefit of carrying forward losses for startups to 10 years. These new cooperatives would also attract a lower tax rate of 15%.
The easing of the compliance burden on MSMEs in India provides the following benefits:
Simplifying tax compliance procedures will help the MSME sector to reduce the costs associated with compliance, such as hiring professionals to help with tax filing.
Instead of spending time on compliance-related activities, MSMEs can now allocate more of their time and their resources to their core operations, such as production and marketing.
The easing of the compliance process will make it easier for the MSME sector to operate. This means that they can now focus on creating more business and expanding their operations.
Easing of compliance burden also means that MSMEs will face a reduced risk of penalties and fines due to non-compliance. This, in turn, will help improve their financial stability and performance.
Easing the compliance process is also beneficial for the government as there will be more transparency and accountability in the MSME sector. This is beneficial for MSMEs as well because this will attract more investment which will result in the growth of these businesses.
As per the 2023 Union Budget, MSMEs will benefit a lot from the government’s support for technology adoption. Here are some of the ways the government’s support for technology adoption can help MSMEs:
To begin with, MSMEs can adopt new technology to not only improve their operational efficiency but also to increase their productivity. This will help them compete with larger businesses.
With new technology, MSMEs can create competitive advantages, better serve their customers and expand their reach to new markets.
By adopting new technologies, MSMEs can reduce costs by automating their manual processes, reducing their labor costs and improving energy efficiency.
The adoption of new technologies can open up new markets for MSMEs. They can expand their reach and tap into a larger customer base.
The 2023 Union Budget in India has proposed several measures to provide subsidies and incentives to MSMEs. These measures are expected to not only reduce their costs but also increase investments as well as encourage entrepreneurship.
The government has allocated subsidies and incentives for MSMEs in sectors such as tourism, textile, food processing and more. This helps in providing targeted support for these industries and helps them grow. Along with this, the government has also announced incentives for MSMEs that adopt new technology. Doing so will improve their competitiveness and reduce costs.
The government has proposed to provide subsidies and incentives to MSMEs in India so that they can overcome barriers to entry, such as high costs, and ensure that they open up new markets that will, in turn, provide more opportunities for growth.
The 2023 Union Budget has laid much-needed emphasis on the importance of focusing on the digital infrastructure as a means to support the growth of MSMEs in India. The government has proposed to expand digital platforms like the Udyam Sakhi portal, which can help these businesses to get better access to a wide range of resources and services.
The government has also emphasized the importance of digital payments for MSMEs. This will reduce the need for physical transactions and improve financial inclusion. Furthermore, the government has shown its support for MSMEs involved in e-commerce to help achieve one of the seven priorities of the Union Budget, inclusive growth.
Finance Minister Nirmala Sitharaman also announced that the government would take measures to increase the scope of DigiLocker services for individuals as well as the MSME sector. This will help in enhancing the accessibility of financial services for these businesses and make the whole process smoother, quicker and more secure.
The 2023 Union Budget has not forgotten about the challenges that MSMEs faced during the Covid-19 pandemic. After taking into consideration those challenges, the government has come up with Vivad se Vishwas I - Relief for MSMEs.
As per this, MSMEs who failed to execute contracts during the Covid pandemic period will get 95% of the forfeited amount relating to bid or performance security. The amount will be returned to them by the government and government undertakings.
To conclude, the 2023 Union Budget is more focused on supporting the growth and development of MSMEs in India. This includes measures to improve access to finance, ease compliance burden, support the adoption of new-age technology and more.
Additionally, the government has also emphasized the importance of digital infrastructure and the adoption of digital technologies so as to help MSMEs access new markets, improve export, reduce costs and also create a competitive space that will promote their growth.
The 2023 Union Budget for India is expected to create a supportive environment for MSMEs to grow themselves, create job opportunities for the youth of the country as well as contribute to the overall economic development of the country.