(The article is submitted for publication in the The Financial Express)
What an anti-climax the Interim Budget (2009-10) had been. The Finance Minister Pranab Mukherjee has left the industrial sector including MSMEs, speechless. Was it an exercise of ‘vote on accounts’ or count of votes?
I think Finance Minister made a forceful political statement on behalf of government which was on shaky wicket- not sure of getting the bold initiatives passed through the Parliament. And he articulated the highlights of UPA regime rather brilliantly. He adopted a pragmatic approach where the interim budget was bound to be long on past achievements and short on new announcements.
There is no denying the fact that he glossed over the current crisis born out of economic slow down and down-played adverse impact in terms of jobs lost. SMEs find mention at two places. The 2% interest rate subvention for SME dominated exports sectors- textiles and garments and gems and jewelry is extended to September 2009. Further, delivering on the last year’s budget promise where two funds of Rs.2,000 crore each were announced for SIDBI - one for risk capital financing and the other for enhancing refinance, the budget documents state both have become functional.
But more importantly, the Finance Minister has dropped ample hints that while fiscal prudence is important, UPA will not shy away from reducing taxes and allowing the budget deficit to swell further in short term to boost domestic demand. Luckily falling inflation figures also provide the head room. This assumes importance in view that the Stimulus package part III likely to be announced soon. It is to be remembered that Government does not need the budget for taking most of the policy initiatives required as the ones announced in previous two stimulus packages.
Now all eyes will be on this new package. What succor such a package should bring for MSMEs?
The previous two stimulus packages (through Government and Reserve Bank) addressed to a large extent the problems of liquidity crunch and enabled restore financial stability. RBI reduced benchmark interest rates from 5.5 to 3.5 and consistently reduced CRR and SLR rates creating conditions for banks to start lending.
The biggest grudge of MSMEs is that almost none of the steps taken through two stimuli reflected easing of situation at ground. The interest rates remain unchanged for most MSMEs, their bills remain unpaid or payments considerably delayed even in hands of Public Sector buyers, enhancement for working capital limits remain as painful and arduous at it was earlier (new demands of excess or extra collateral for enhancement of limits) and sensitivity to restructuring needs of MSMEs remain hidden in RBI guidelines.
Therefore, the first requirement is enforcing mechanism for steps already taken.
Secondly, admitting the gravity of the crisis, taking genuine ‘contra cyclical’ measures for MSMEs which got hurt in the whirlwind between September and December 2008. Such measures should include moratorium for repayment of loans for one year as affected MSMEs are unable to service repayment of loans; reduction in loan margin requirement by 5~10%; longer gestation by 12 months; ad-hoc demand loans by 20% to existing buyers; one time settlement on ‘no-profit no loss’ principle for MSMEs hurt in commodity crash or currency related contracts.
Thirdly, immediately reversing the tariff and non-tariff barriers already enacted or planned on imports of MSME raw material such as Steel, Copper, Aluminium and polymers.
And last but not the least, strengthening delayed payment provisions under the MSMED Act by effecting suitable changes in Income Tax Act. (FISME had proposed amendment through Section 43-B of the Income Tax Act: “(g) any sum payable by the assesse to a micro and small unit as defined under MSMED Act and outstanding for more than thirty days.”). For, PSUs, clear instructions need to be issued for timely payment with penalty clauses for non-compliance.
MSMEs have suffered from a hiatus, a temporary setback. They will soon be back on track provided enough sensitivity is shown to them.
Anil Bhardwaj
Secretary General
Federation of Indian Micro and Small & Medium Enterprises (FISME)
I think Finance Minister made a forceful political statement on behalf of government which was on shaky wicket- not sure of getting the bold initiatives passed through the Parliament. And he articulated the highlights of UPA regime rather brilliantly. He adopted a pragmatic approach where the interim budget was bound to be long on past achievements and short on new announcements.
There is no denying the fact that he glossed over the current crisis born out of economic slow down and down-played adverse impact in terms of jobs lost. SMEs find mention at two places. The 2% interest rate subvention for SME dominated exports sectors- textiles and garments and gems and jewelry is extended to September 2009. Further, delivering on the last year’s budget promise where two funds of Rs.2,000 crore each were announced for SIDBI - one for risk capital financing and the other for enhancing refinance, the budget documents state both have become functional.
But more importantly, the Finance Minister has dropped ample hints that while fiscal prudence is important, UPA will not shy away from reducing taxes and allowing the budget deficit to swell further in short term to boost domestic demand. Luckily falling inflation figures also provide the head room. This assumes importance in view that the Stimulus package part III likely to be announced soon. It is to be remembered that Government does not need the budget for taking most of the policy initiatives required as the ones announced in previous two stimulus packages.
Now all eyes will be on this new package. What succor such a package should bring for MSMEs?
The previous two stimulus packages (through Government and Reserve Bank) addressed to a large extent the problems of liquidity crunch and enabled restore financial stability. RBI reduced benchmark interest rates from 5.5 to 3.5 and consistently reduced CRR and SLR rates creating conditions for banks to start lending.
The biggest grudge of MSMEs is that almost none of the steps taken through two stimuli reflected easing of situation at ground. The interest rates remain unchanged for most MSMEs, their bills remain unpaid or payments considerably delayed even in hands of Public Sector buyers, enhancement for working capital limits remain as painful and arduous at it was earlier (new demands of excess or extra collateral for enhancement of limits) and sensitivity to restructuring needs of MSMEs remain hidden in RBI guidelines.
Therefore, the first requirement is enforcing mechanism for steps already taken.
Secondly, admitting the gravity of the crisis, taking genuine ‘contra cyclical’ measures for MSMEs which got hurt in the whirlwind between September and December 2008. Such measures should include moratorium for repayment of loans for one year as affected MSMEs are unable to service repayment of loans; reduction in loan margin requirement by 5~10%; longer gestation by 12 months; ad-hoc demand loans by 20% to existing buyers; one time settlement on ‘no-profit no loss’ principle for MSMEs hurt in commodity crash or currency related contracts.
Thirdly, immediately reversing the tariff and non-tariff barriers already enacted or planned on imports of MSME raw material such as Steel, Copper, Aluminium and polymers.
And last but not the least, strengthening delayed payment provisions under the MSMED Act by effecting suitable changes in Income Tax Act. (FISME had proposed amendment through Section 43-B of the Income Tax Act: “(g) any sum payable by the assesse to a micro and small unit as defined under MSMED Act and outstanding for more than thirty days.”). For, PSUs, clear instructions need to be issued for timely payment with penalty clauses for non-compliance.
MSMEs have suffered from a hiatus, a temporary setback. They will soon be back on track provided enough sensitivity is shown to them.
Anil Bhardwaj
Secretary General
Federation of Indian Micro and Small & Medium Enterprises (FISME)
1 comment:
The views expressed in Sh Bhardwaj's article are well thought,mind provocative as regards to the benefits accrued to the MSMEs.I
fully endorse his findings that the Hon'ble Finance Minister's interim budget stuck to the constitutional script mainly by avoiding any new big-ticket expenditure, changes in taxation or explicit stimuli.
The exporters in textile sector do not see much relief at 2% tax subvention on pre- shipment and post-shipment credit as annouced.They see lack of any measures to uplift the labour intensive textile sector ignored by the Govt. in the stimulus packages will demotivate the export fraternity.The projection of export of readymade garments has already taken a dip by 10% in the past 3 months.The long demand of the exporters for extending the duty drawback rate against the current 8.5% has not been acceded to.This has affected the sector in as much as textile sector in China received duty drawback relief thrice in recent past resulting in their products being more competitive as compared to India to the potential buyers.
As regards to cut in interest rates for MSMEs,the Banks view that if the inflation falls to the level of 4-4.5%and the returns on deposits increase by 2-2.5%, Banks may think of reducing the interest rate.However, Banks should strongly consider restructuring of SMEs accounts who are unable to service of repayment of loans and a rescheduling of the repayment will be welcome.
The panacea for MSMEs as suggested by Sh Bhardwaj if given a serious thought by the people who take decisions at the highest echelons of Govt. will definitely put the MSMEs on the track again.
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