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Published on 15/01/2020 10:49:08 AM | Source: Live Mint

Union budget may allocate more funds to MSME sector

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NEW DELHI : The Union budget for 2020-21 could see higher fund allocation for small and medium businesses currently battling a demand slowdown and liquidity crunch.

The micro, small and medium enterprises (MSME) ministry has sought a 71% increase over and above the budgetary allocation made last year, MSME minister Nitin Gadkari said.

“We have sought ₹12,000 crore budgetary allocation for MSMEs in the upcoming Union Budget," the MSME minister told Mint. The allocation for the sector in the current financial year is ₹7,011 crore.

Gadkari’s statement comes at an important time. MSMEs are considered key drivers of job creation and economic growth in developing nations—a significant constituency as India attempts to revive economic growth that hit a six-year low of 4.5% in the July-September quarter.

MSMEs account for about 45% of manufacturing output, more than 40% of exports, over 28% of gross domestic product (GDP) and employ about 111 million people. Politically, they are an important support base for the ruling Bharatiya Janata Party (BJP).

There are as many as 63.38 million MSMEs in India—all firms with physical capital valued at less than ₹10 crore.

“The MSMEs are rightly labelled as the backbone of Indian economy, given their wide presence in every sector and their close relationship with larger companies as suppliers and partners. MSMEs need to be nurtured in order to drive three essential factors in today’s economy—exports, employment and entrepreneurship," said Chandrajit Banerjee, director general, Confederation of Indian Industry (CII).

Small businesses have been facing disruptions and were hit hard by the government’s massive currency culling exercise in November 2016, followed by the implementation of the goods and services tax (GST) eight months later. The sector was further affected by the liquidity crunch faced by non-banking financial companies (NBFCs) after a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) and a pile of bad loans hampering banks’ ability to lend. The stress in the sector has had a huge socio-economic impact.

“Due to their informal nature, MSMEs lack access to formal credit as banks face challenges in credit risk assessment owing to lack of financial information, historical cash flow data, etc. Further, very few MSMEs are able to attract equity support and venture capital financing," the Reserve Bank of India (RBI) said in its report in June last year.

While the government has been taking steps to support MSMEs, the sector needs more as it continues to face challenges in accessing timely and adequate finance, technology and skilled manpower.

In November 2018, Prime Minister Narendra Modi launched a scheme to grant quick access to credit, in which loan requests for up to ₹1 crore would be approved online in principle in less than an hour. He also announced subsidies on interest on loans for businesses registered under GST, among a slew of schemes. Recently, the finance minister also asked large corporations to expedite clearing dues worth ₹40,000 crore to MSMEs and also asked banks not to declare stressed assets of MSMEs as non-performing asset (NPA) till 31 March 2020, invoking the existing RBI guidelines.