Seven policy initiatives to revive Indian MSMEs, boost GDP growth

Indian MSMEs
A recovery of the Indian economy is not possible without the revival of MSMEs that can create a large number of jobs and generate consumption demand.

By KE Raghunathan

The Indian economy had a dreadful financial year 2020-21, ravaged by the Covid-19 pandemic and the economic crisis triggered by it. The crisis triggered an economic and labour market shock, affecting production and consumption of goods and services as well as investment. While the crisis impacted all sectors of the economy, the Micro, Small & Medium Enterprises were the worst affected. The six million plus MSMEs that employ more than 12 crore people in the country witnessed severe disruptions with the crisis affecting their cash cycles.

An economic recovery in India is impossible without MSMEs playing a big part. Revival of the MSMEs can create jobs, which in turn can boost consumption demand. The government will need to help the struggling MSMEs sector tide over the current crisis as it can contribute majorly towards achieving Prime Minister’s vision of Atmanirbhar Bharat. Here are seven suggestion for an MSME resurgence.

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Fair price shops for raw materials used by MSMEs

The biggest concern for MSMEs is the timely availability of raw materials at reasonable prices. Traders indulge in unfair trade practices to push prices up. The National Small Industries Corporation (NSIC) must set up fair price shops for micro enterprises for the supply of essential raw materials at Industrial estates and parks. The shops must offer credit facility to MSMEs.

Abolish capital gains tax to enable MSMEs sell property

A large number of entrepreneurs are in dire need of funds for regularising their loan accounts, pay their suppliers and reinvest in business. The only assets they have is the land and building on which they run the factory or any other immovable property including their homes/ office. Even if they dispose of the property at distress prices, they will end up paying up to 20% of the proceeds as long-term capital gain tax.

This is exorbitant especially when their property is more than 10 years old. The guideline values were revised significantly after 2011 and the capital gain tax robs the entrepreneurs of their only lifeline. The parliamentary standing committee on finance has also recommended that long-term capital gains tax be abolished for all investments in MSME units.

The government must take into account the fact that such distress sales happen when the owners are in dire need of funds and in most cases, they sell way below the market price. The finance ministry should consider abolition of capital gains tax for MSME entrepreneurs.

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Extend GST amnesty scheme, offer exemption

The government should consider GST exemption till March 2022 for all micro units (turnover up to Rs 5 crore). It will help micro enterprise owners focus on their business. The interest rates on delayed GST payments are very high and needs rationalisation.

Export benefits for MSMEs

Most of the Micro and Small exporters are facing severe crisis in terms of high raw material cost, lower sale price in the global market and very thin or negative margins. For exports, the Union government is offering incentives in the form of MEIS script. However, MSMEs are unable to apply for the period between April 2020 and December 2020 since funds are not allocated. From January 2021, there is a new scheme RoDTEP, but for this the rate is still not fixed for export products, leading to difficulty in signing sale contract.

Realisation of outstanding dues of MSMEs

Banks should offer Trade accounts (like savings and current accounts) for MSME and act as intermediaries for supplies, corporates, PSUs, government ministries and state departments to monitor delay in payments and to ensure settlement on due date. Surplus on current and trade accounts will be sustainable only if the MSMEs prosper.

READTargeted incentives can boost manufacturing sector, revive MSMEs

Job creation for freshers

Provide stipends of Rs 6,000 per month to students to undergo six-month compulsory internships in MSMEs. All first-time job seekers, irrespective of their educational background, should be given a stipend if they take up an internship and this payment shall be routed through the enterprises.

Prevention of NPA rise and provide ease of voluntary closure

The government must extend tenure of all pending loans by one year with a base interest rate equivalent to the repo rate this year. The normal interest rates as applicable to the loan, can be charged from April 21. One-time settlement shall be offered for those who want to close and restart with a value at 75% of the principal value outstanding and waiver of all interest and penal interest due. This can be one step towards the proposed ‘bad bank’ and save stakeholders from unnecessary litigation.

At least 80% of the country’s MSMEs are facing an existential crisis. Through these seven policy initiatives, the government can put this important sector of the economy back on track. An MSME revival can give a booster shot to the economy by generating employment and triggering consumer demand.

(The author is convenor, Consortium of Indian Associations and former president, All India Manufacturers Organisation. The views are personal.)