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Budget 2015: Making MSMEs Big!

Published on Sat, Feb 21,2015 | 09:10, Updated at Sat, Feb 21 at 09:10Source : 

Budget 2015: Making MSMEs Big!

By: Rohinton Sidhwa-Partner; G Chandrashekhar-Director
& Swati Goyal-Manager, Deloitte Haskins & Sells LLP

Good things come in small packages, they say. Probably they are not wrong after all – MSMEs in India contribute to 45% of India’s manufacturing sector output, 40% of total exports and employ around 60 million people . Therefore, it becomes important to understand what challenges this sector faces, and what is further needed to incentivize it and give it that much needed impetus.

The Ministry of Micro, Small and Medium Enterprises (M/o MSME), Government of India, designs and implements policies and programmes through its field organizations and attached offices for promotion and growth of MSME sector. Government introduced a formal framework in 2006 in the form of MSMED Act, which aimed at facilitating development of this sector and enhancing its competitiveness. Yet, this sector faces critical issues in terms of easy finance and credit facilities, limited access to technology and innovative marketing, apart from others like supply chain efficiencies and talent retention, all of which are turning out to be roadblocks to its development. MSMEs would be looking forward to Budget 2015 to address some of these issues.

Financing MSMEs

Most Indian MSMEs start with minimal capital and require funding, especially after initial growth. Cumbersome procedures of banks, requirement of collaterals, high interest rates make it difficult for them to obtain funds, especially in a timely manner. A more encompassing and liberating financial inclusion for MSMEs, on the lines of government’s recent scheme for individuals, is the need of the hour. Risk of turning into non-performing assets (NPAs) is the most common factor why banks may deny loans or offer loans at high interest rates / with extensive collaterals. The government should introduce ways to incentivize banks into giving such loans, or if necessary even mandate that a prescribed percentage of total assets constitute loans extended to MSMEs, in the upcoming Budget. The Government should encourage banks to establish a more robust system of timely credit evaluation and debt recovery for monitoring NPAs as well. Further, the government already has Credit Guarantee Scheme for access to collateral-free credit from banks. However, most MSMEs are either unaware about it, or if aware, have not been able to benefit from it for some reason or the other . It is important to take steps for disseminating greater awareness about such schemes and ensuring smoother administration. The recent initiative of introduction of small and medium exchanges which provide options for equity financing (as against the traditional debt financing) through relatively easier listing and IPO norms is a welcome move. Efforts to encourage availing of this platform by MSMEs should continue to be made. Government should allocate annual expenditure towards these initiatives.

Updated technology

As much as technology can result in improving effectiveness, reducing costs and transforming businesses, the same could be expensive at the initial stage, especially when benefits are derived over a longer term. Further, the government recognizes that, apart from cost, MSMEs lack in accessing technology due to other factors  such as:

- Lack of awareness about benefits of technology to production and production cost
- Lack of guidance (consultancy support/services) for technological information
- Lack of skilled manpower to manage and run technology set-ups
- Poor adaptability to changing trade, trends, etc.
M/o MSME has introduced schemes providing capital subsidy for technology adoption and enhancing competitiveness. MSMEs could also explore the more recent tools such as social media and cloud computing. Strategies to create awareness, generate interest and inspire adoption of such mediums by MSMEs should be developed and implemented by the government along with M/o MSME in 2015. Tax incentives, in the form of weighted deduction for expenses incurred or higher depreciation for capital outlay on adopting newer technologies, could be one of the ways of doing so.

Marketing assistance

Consumer today has a short-lived memory. New and innovative marketing schemes are developed by companies in order to arouse interest, create brand presence and leave an impact. These initiatives have become essential to survive in today’s competitive market, be it manufacturing or service sector. MSMEs tend to lack that edge and lose out on opportunities, especially when it comes to untapped foreign markets. While the big players are employing new-age marketing strategies, MSMEs are still struggling with the old ones. Not only are most MSMEs unaware about such methods, they are also uninformed about various schemes that M/o MSME has been implementing to encourage exports by MSMEs and their participation at International Trade Fairs and exhibitions. Tax rebates on export revenues may motivate MSMEs to work harder towards exploring overseas markets.

As is evident from most of the above aspects, lack of awareness and access to information and resources is the primary reason which MSMEs are still struggling with carrying out business. The contribution that they make to the Indian economy is already significant, we can only imagine the impact they would have if such hurdles are removed. This sector is looking forward to Budget 2015 to address some of these aspects, for it needs that Meaningful Stimulus and Momentum for an Elevation to the next level.

ii Indian SME Survey by Firstbiz dated July 2014


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