Nilanjana Bargotra
The budget is akin to having a large dinner party; you have invited a sizable number of guests, expecting to be served their favourite dish. As the host, the onus falls on you to prepare something that appeals to the preferences of most, while at the very minimum leaves everyone satiated. So why exactly would you serve someone double portions? In other words,
Why did the government double its outlay to the MSME sector to a record INR 15,700 crores?
For starters, it is the second largest employer in India, with an estimated 633.8 lakh units. As per the DGCIS, nearly half our exports and 30% of our GDP is from the MSME sector. Having faced substantial heat in the past for not being fiscally expansionary enough (and with a fiscal deficit target of 6.8% this year)- a doubling of the MSME allocation was perhaps in line with the sectors growing importance.
A closer analysis suggests that these measures are a succession to the COVID-relief package, and not as straightforward a progression of the vision from last years budget. Though geared towards providing MSMEs with a safety net cushioning the losses from the pandemic, several schemes which were a lifeline for traditional, rural entrepreneurs have seen a drop in their outlay.
Tracing the budget announcements with the COVID-relief schemes:
1.Strategic long-term immunity (Atma Nirbhar Bharat) The first and most crucial extension was the Atma Nirbhar Bharat Abhiyan. With businesses facing low economic activity during the pandemic, their competitiveness was safeguarded by a ban on foreign tenders from participating in government procurement (for bids up to INR 200 crores). Albeit a good move to protect Indian industries from foreign competition given a depressed market demand, businesses importing intermediate inputs faced import discouragements and rising costs.
While the budget extends this ban on overseas procurement, the need to balance protectionism and promotion has been recognized. To promote greater use of domestic inputs in the production process, custom duties for inputs which were in Indias competitive advantage (such as cotton, raw silk were increased by 10% and 5% respectively (pp36, 187). For leather products, exemptions made on imports were rationalized to make imported finished-goods more expensive as compared to domestic products (pp36, 186). Custom duties for inputs like imported steel, copper semis, flats and alloys was reduced to a flat rate of 7.5% and made cheaper (pp84, 180).
2. Using e-platforms to support auxiliary activities – Several ancillary activities such as trade fairs and common market places risked disruption and thus in the COVID relief package, a plan to promote e-market linkages (as a replacement to trade fairs and exhibitions) and the use of fintech to enhance transaction-based lending (with data generated through e-markets) was announced. Carrying this forward into this years budget, the integration of 1000 new mandis in the E-NAM network and a INR 1500-crores fund to boost the digital payments infrastructure was also announced.
3. Leniency in the Insolvency and Bankruptcy Code (IBC) proceedings Though necessary measures to strengthen competitiveness and e-infrastructure were implemented, perhaps the greatest risk was that of closures. With insolvency running high in 2020, the government timely announced suspension of all IBC proceedings for one year (for MSMEs). Debts related to COVID-19 were excluded from the definition of default. Furthermore, the default threshold was increased from INR 1 lakh to INR 1 crore to prevent automatically triggering default proceedings against small businesses. And though the erstwhile structure treated small and big businesses equally, a special resolution framework under section 240-A of the IBC was announced for MSMEs.
This reassurance of an alternative, tailor-made, debt resolution mechanism became particularly vital since the existing procedure of insolvency resolution was designed to make large businesses more financially disciplined, with greater liberty to third-party creditors to design a resolution process. The reiterated commitment in this years budget to introduce a special resolution framework for MSMEs is definitely welcomed. Recent reports state that the special mechanism will allow only debtors (business owners) to trigger their own default proceedings and will let them continue running their business, unlike the CIRP creditor-friendly process.
4. Financial support through guaranteed, collateral-free loans, moratoriums The last but most important ingredient which was carried forward from the COVID-19 package into the budget is the Emergency Credit Line Guarantee Scheme (ECLGS), a scheme which has tried to crack risk-asymmetries for both lenders and borrowers. While lenders were able to extend loans that were guaranteed by the government(NCGTC), borrowers were able to take loans that came without additional collateral requirements. Although the scheme is likely to end by 31st March 2021, some reports suggest that a 6-month extension may be on the cards.
Interestingly, close to 64% of this years MSME outlay is towards the extension of this single scheme. This reallocation of 10,000 crores for the GECL has perhaps been made possible by reducing other important outlays: The KVIC outlay fell by 40% while the outlay for ASPIRE (project for the Promotion of Innovation, Rural Industry and Entrepreneurship) has also been halved. Even outlays for schemes which were meant for the technology upgradation of MSMEs have been halved, perhaps in view of realigning focus from long-term growth to short-term recovery. While one could argue that the beneficiaries of the GECL stand at far greater a number than the Khadi overheads (MSME Annual report 2019-20, pp.20, 1.4.5), it does leave room for thought:
Why exactly has the government decided to focus the MSME budget on one scheme?
Given the COVID-impact on the economy, reallocation of funds from schemes with greater gestation periods to schemes that are more likely to bring immediate fruition seems inevitable, and focussing on schemes with greater reach to all sections of MSMEs rather than a niche arm is perhaps the best choice. It is also entirely possible that a monetary stance was adopted in supporting small businesses (through liquidity-infusion and credit guarantees), in the expectation that most MSMEs would have already tapped into the borrowings-market to support themselves during the pandemic.
This however does come with one caveat In an environment of uncertainty, businesses may have been risk-averse in their credit-behaviour. Therefore, understanding which businesses took up the monetary route to support their recovery will be crucial.
Reports state that the ECLGS has been extremely helpful and instrumental in buffering the impact of the pandemic, with a good takeup and close to 3/4th of the initial COVID-amount disbursed. While this is really promising for recovery, it will perhaps take time to fully comprehend a.) the profile of borrowers that have benefitted from this facility and b.) what factors have enabled uptake. And while the budget hits all the right notes for MSME recovery and sets a great blueprint for growth, it may be awhile before we see the nutritional value of double portions at dinner, benefit everyone at the table.
The author is Research Associate, LEAD at Krea University
Views are personal and may not necessarily reflect those of Qrius