Impact of Union budget 2022 on MSMEs

Union Finance and Corporate Affairs Minister Nirmala Sitharaman announced the Union Budget for 2022 earlier this year. Of all the changes and provisions announced, a few provisions are expected to significantly impact micro, small and medium scale enterprises in India. This article highlights the areas of impact of Budget 2022 on MSMEs in India.

The Emergency Credit Line Guarantee Scheme (ECLGS) was extended by one year and will remain available until March 2023. This scheme is expected to benefit more than 130 lakh MSMEs. Additionally, the guarantee cover under this scheme has been expanded from ₹50,000 crores to a total cover of ₹5 lakh crore. The additional amount is being dedicated to the hospitality sector and related enterprises. India has announced resuming full-scale international flights from March 27th, 2022. India’s tourism and hospitality industry accounted for around 12% of employment and 9-10% of GDP. This move comes at the right time. However, experts believe it is not enough to reverse the full impact of the COVID-19 pandemic.

The Credit Guarantee Trust for Micro and Small Enterprises is expected to see an infusion of additional funds in a bid to facilitate growth, especially in the Microenterprise sector. In the previous Budget provisions, micro-enterprises were unable to fully optimize the benefits of the ECLGS scheme as they were required to have existing outstanding credit to avail of ECLGS. However, the revamp of the CGTMSE scheme solves that concern.

In a bid to streamline MSME employment opportunities, the Finance Minister announced the interlinking of the four Government data portals of Udyam, e-Shram, National Career Service (NCS), and Atmanirbhar Skilled Employee-Employer Mapping (ASEEM). Essentially, the portals will now serve as live, organic databases that will deliver Government to Consumer (G2C), Business to Consumer (B2C), and Business to Business (B2B) services, including credit facilitation, skilling, and recruitment.

In June 2021, the World Bank approved assistance worth $500 million as a part of the Raising and

Accelerating MSME Performance (RAMP) program. The Finance Minister has announced a rollout of ₹6,000 crores over the next five years to help build MSME resilience, so businesses don’t collapse. This program will improve MSME access to credit and support ongoing MSME-focused initiatives. However, experts have expressed concern over the insufficiency of the ₹6,000 crore budget.

Instead of bank guarantees, the Finance Minister announced the alternative of surety bonds by insurance companies as a substitute for MSMEs. This move is expected to give a helping hand to MSME suppliers and work contractors as they can now rely on insurance firms for the surety of payments. Essentially, surety bonds are a risk transfer mechanism under which the insurance firm will assure the project owner of the performance obligation of the MSME. MSMEs often face the issue of being unable to obtain a bank guarantee as they don’t fall within the bank guarantee margin, often resulting in MSMEs losing out on orders. While the Government has reserved 25% of all public sector unit contracts for MSMEs, even those with potential tend to lose out because of the non-availability and cost of bank guarantees. The introduction of surety bonds should help address this concern.

In yet another step to facilitate the Make In India Initiative, the Finance Minister announced an extension on the exemption of customs duty provided on steel scrap in Budget 2021. In addition, the Finance Minister also revoked duties applicable to anti-dumping and countervailing of stainless steel and coated steel flat products, alloy steel bars, and high-speed steel. This move encourages more MSMEs to take up manufacturing within the country.

India envisions having 280 GW of installed solar capacity by 2030. A boost of ₹19,500 crores to the product-linked incentive scheme dedicated to manufacturing solar PV modules should help create close to 60 lakh new job opportunities. This move is also expected to reduce dependency on imports and facilitate self-reliance.

The Finance Minister announced the extension of the concessional corporate tax rate of 15% until March 2024 to encourage newly established manufacturing companies. This extension is another welcome move that will strengthen the foundation of the Make In India initiative.

The new financial year is around the corner, and MSMEs are expected to benefit from the announced programs, facilitating growth and employment through digital channels. Unfortunately, while experts had recommended a separate economic stimulus package specifically helping MSMEs, the Finance Minister did not announce one. However, the programs mentioned above stand as alternatives and are expected to benefit Indian MSMEs by quite a positive margin in FY 2022-23.

Author: Anil Paranjape, Director, Avalara India.

Publication: CXO Outlook.