Budget 2021: What MSMEs Expected And Received

Finance Minister Nirmala Sitharaman presented the Union Budget 2021-2022 on February 1. This Budget is special because it comes after a bruising year when Covid-19 sent the economy into a deep recession. The Micro, Small and Medium Enterprises (MSME) sector was hit particularly hard. With the pandemic far from over, the real work of recovery starts now. How India recovers depends greatly on how MSMEs recover. Why? Because this sector has always been crucial to India’s economic health, contributing 29% to gross domestic product (GDP) and 40% to exports and employing 110 million people.    

For struggling small businesses, exporters and importers in India, it is the Budget that holds the greatest hope in these difficult times. What were their expectations of the Budget and what did they get from it? This piece tackles the following topics:

• How did Covid-19 affect MSMEs?
• What did MSMEs do to survive the pandemic?
• What did the government do to help MSMEs?
• What expectations did MSMEs have of the Budget?
• What did the Budget deliver?   

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How did Covid-19 affect MSMEs?

In March 2020, India announced a nationwide lockdown and stopped all business activity barring trade in essentials. With stringent restrictions in place for close to half the year, demand dropped, labour became scarce with migrant workers heading home, and the global supply chain crashed. The MSME sector suffered multiple setbacks: 

• Demand down: A steep drop in customer orders was common across MSMEs. Export order cancellations hit 70%-80% in April, according to Federation of Indian Export Organisations chief Sharad Kumar Saraf.  
• Business pause: A survey of 500 MSMEs in June, conducted by IT solutions firm Endurance International Group, said one-third of respondents had halted their business activities temporarily and expected to stay shut for at least six months. Many businesses shut down permanently.   
• Revenue drop: In a survey of 14,444 MSMEs in May, half the respondents reported a 20%-50% drop in earnings. Restrictions were gradually lifted and economic activity resumed in the second half of 2020 but revenues remained mute. The trend continues in 2021.    
• Cash flow crunch: The resultant liquidity crunch made it difficult for MSMEs to repay loans and pay salaries. Many had to lay off employees and vacate their offices.
• Import-export hit:Exports fell by a record 60% and imports by 59% in April. After a slow revival, December data showed exports down by a marginal 0.80% year-on-year and imports up 7.6% year-on-year. But it’s too early to cheer. The Economic Survey 2021 – a report card of India’s financial health in 2020-2021 – predicts exports will contract by 5.8% and imports by 11.3% in the second half of the current financial year.

What MSMEs did to stay afloat

The pandemic forced MSMEs to adapt in order to survive:   

• Trade in essentials: Many small businesses switched to the production of in-demand essential goods such as masks, hand sanitisers, face shields and personal protective equipment (PPE).
• e-commerce: Many branched out into e-commerce as brick-and-mortar stores shut down and online sales increased.          
• Digitisation: Businesses embraced other digital tools. According to the Endurance International Group survey, 50% of those surveyed said they started using video conferencing and WhatsApp for business. 

What the government did to help

The state response to Covid-19 was the Rs 20-lakh-crore Atmanirbhar Bharat Abhiyan (Self-Reliant India Mission) with key relief measures for MSMEs:

• Collateral-free loans: A four-year loan with payments starting after 12 months was made available to MSMEs with a turnover of up to Rs 100 crore and an outstanding loan of up to Rs 25 crore. The borrowing limit was 20% of their total outstanding credit as of February 29, 2020. The government allocated Rs 3 lakh crore for this scheme. As of December, loans worth Rs 2,05,563 crore had been disbursed to 81 lakh accounts.       
• Partial credit guarantee: A further Rs 20,000 crore was set aside to allow banks to lend to MSMEs that were unable to repay existing loans. Should the MSME fail to repay the loan, the government would stand guarantee for a portion of it. This scheme was expected to benefit 2 lakh MSMEs.       
• Fund of Funds: Another initiative was the creation of a Rs 50,000-crore fund to help struggling MSMEs with the potential to grow. The government contributed Rs 10,000 crore to the fund and the rest was to be sourced from institutions such as the State Bank of India and Life Insurance Corporation.     
• Revised definitions: Accepting a long-standing demand of the sector, the government approved a change in MSME definitions. As per the new definitions, a micro enterprise is a business with an investment of not more than Rs 1 crore and a Rs 5-crore turnover, a small unit is one with an investment of not more than Rs 10 crore and a Rs 50-crore turnover, and a medium unit is one with an investment not exceeding Rs 50 crore and a Rs 250-crore turnover.
• Global tenders disallowed: The government disallowed foreign tenders in government schemes of up to Rs 200 crore to give MSMEs a chance. 
• Clearing dues: It promised to clear dues owed to MSMEs within 45 days.   
• Others: Outside of Atmanirbhar Bharat, the Ministry of Micro, Small and Medium Enterprises announced financial relief in the form of special funds to artisans and a six-month moratorium on MSME loans with no change in credit rating during this period. It launched an initiative for the production of hand sanitiser dispensers not just to meet domestic demand but to promote export and reduce dependence on Chinese-made dispensers.       

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Budget 2021: Expectation versus reality

To navigate a difficult year ahead, MSMEs had clear expectations of the Budget. Did it deliver? We take a look at the main demands/expectations of the sector and what it got:

1. Credit and finance

Expectations:

• Easy collateral-free loans with borrowing limits increased to Rs 5 crore for micro, Rs 15 crore for small and Rs 35 crore for medium enterprises
• Extension of interest subvention schemes (where government pays part of the interest on a loan)
• Wider availability of credit from formal lending sources such as banks
• Linking of the Trade Receivables Discounting System (TReDS) to the Goods and Services Tax (GST) regime to bring transparency to the lending process and thereby encourage banks to lend to MSMEs
• Reduction in corporate tax rates
• Easing of the Foreign Exchange Management Act to encourage foreign investment in MSMEs 

What Budget delivered: 

• Rs 15,700-crore allocation to the sector, double the amount of the previous Budget
• A special debt resolution framework for MSMEs to be incorporated in the National Company Law Tribunal

2.  Export promotion

Expectations:

• Simplification (rationalisation) of duties and tariffs
• Extension of the Production-Linked Incentive (PLI) scheme – which aims to boost domestic manufacturing and lower dependence on imports – to cover more export-oriented sectors, such as engineering MSMEs

What Budget delivered:

• Mega Investment Textiles Parks (MITRA) scheme to boost textile production and export. Seven textile parks to come up within three years
• Customs duty exemption on import of some leathers, produced in good quality and quantity in India, to be withdrawn to encourage domestic production and export 
• Customs duty increased for certain MSME products such as plastic builder wares (10% to 15%), steel screws and nuts (10% to 15%), cotton (0% to 5%), synthetic cut and polished stones (7.5% to 15%)
• Customs duty on raw material for man-made textiles (caprolactam, nylon chips, nylon fibre, nylon yarn) uniformly reduced to 5% to simplify duties, promote export
• Key amendments to the Customs Act proposed to facilitate trade. These include a) setting up a two-year timeline to complete customs investigations, b) allowing importers/exporters to make specific amendments on self-amendment basis without official approval, c) encouraging paperless processing through the use of a common portal to serve notices and orders and act as a one-point digital interface between traders and customs

3. Inflation control

Expectations:

• Steps to shield small businesses from rising prices
• Curbing the fiscal deficit (difference between the government’s income and expenditure)   

What Budget delivered:

• Customs duty on semis, flats, long products of non-alloy, alloy and stainless steel reduced to 7.5% to counter the steep rise in international iron and steel prices
• Customs duty on steel scrap exempted till March 31, 2022, and customs duty on copper scrap reduced to 2.5% to protect metal recyclers
• Anti-dumping duty (ADD) and countervailing duty (CVD) withdrawn on certain steel products
• Fiscal deficit for 2020-2021 stands at 9.5% of GDP while that for 2021-2022 is projected at 6.8%   

4. Simplification of GST

Expectations:

• Lowering of GST rate on professional services from 18% to 5% 
• Easing of the requirement for physical verification of office address for GST registration, which increases registration time and compliance costs for MSMEs
• Addressing concerns over the powers of tax authorities to cancel GST registrations, which MSMEs allege leads to harassment and corruption when officers act arbitrarily

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What Budget delivered:

The Budget announced amendments to the Central GST Act and Integrated GST Act, including the following:

• The requirement of getting annual accounts audited and reconciliation statement submitted has been withdrawn
• Filing of appeal against seizure or confiscation of goods in transit to be allowed only on payment of a sum equal to 25% of the penalty imposed
• Stricter compliance rules for availing of input tax credit

5. Infrastructure push

Expectations:

• Development and improvement of infrastructure to support manufacturing and employment generation

What Budget delivered:

On roads

• Rs 1.18-lakh-crore allocation for roads and highways sector 
• More than 13,000 km of roads to be built under Bharatmala Pariyojana project, of which 3,800 km is ready
• Another project for 8,500 km of roads to be awarded by March 2022
• Additionally, 11,000 km of national highway corridors to be completed by March 2022
• Construction activity expected this year for flagship projects such as the Delhi-Mumbai Expressway, Bengaluru-Chennai Expressway, Kanpur-Lucknow Expressway and Delhi-Dehradun Economic Corridor

On rail   

• Rs 1,10,055-crore allocation for the Railways
• Eastern and Western dedicated freight corridors to be commissioned by June 2022
• Plans announced for East Coast Corridor (Kharagpur to Vijayawada), East-West Corridor (Bhusaval to Kharagpur to Dankuni) and North-South Corridor (Itarsi to Vijayawada)

On ports and shipping 

• Major ports to move to public-private partnership (PPP) mode of management. To this end, seven port projects worth Rs 2,000 crore to be launched in 2021-2022
• Subsidy support to Indian shipping companies in global tenders floated by ministries and Central Public Sector Enterprises

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6. Social security for workers

Expectations:

• Formalisation of employment benefits 
• Social security in the form of insurance benefits
• Skill development programmes for workers 

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What Budget delivered:

• One Nation One Ration Card scheme allowing beneficiaries to claim their rations anywhere in India. Largely expected to benefit migrant workers
• Website to be created for collection of data on construction and gig workers with the aim of formulating health, housing, skill, insurance, credit, and food schemes for migrant workers 
• Minimum wages to apply to all categories of workers
• Women allowed to work in all categories and on night shifts with adequate protection

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7. Digitisation

Expectations:

• Digital payments framework for easier access to financial services 
• Technological upgradation for small businesses

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What Budget delivered:

• Rs 1,500-crore scheme to promote digital modes of payment

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8. Boost to start-ups

Expectations:

• Easier access to formal funds
• Simplification of taxes
• Easing up of tax scrutiny to stop start-ups from moving out of India 
• Easier compliance requirements
• Encouragement to Indian investors to fund home-grown start-ups

What Budget delivered:

• Eligibility for claiming three-year tax holiday extended by a year till March 31, 2022
• Exemption from capital gains tax extended by a year till March 31, 2022, to incentivise investment in start-ups
• Resident/non-resident Indians can set up One Person Companies (OPCs) without restrictions on paid up capital and turnover, and can convert these into any other type of company (public, private, etc) at any time 

Budget 2021 clearly put an emphasis on MSMEs in its bid to bring India out of a deep slump. Are the measures enough? It is perhaps too early to tell. What’s certain is that the recovery process will be long and hard. And this all-important sector will need a lot more assistance from the government going forward.