MSME Sector That Needs The Attention For Inclusive Growth

India as the fifth largest economy has two major issues to focus on in the coming budget of 2023-24, that is, inclusive growth and sustainable quality employment for its young population below the age of 35 which constitutes 65 per cent of the total population. This budget is to lay the principles clear as the window to equip and take advantage of young India in this decade so that they are gainfully employed in the growth story otherwise they will be laggards and a liability adding to the issues related to inclusive growth like poverty, malnutrition, hunger index, stunting etc. 

To achieve the goal of a $5 trillion economy (having missed the first target of 2022) there is no other option than focusing on the 63 million MSMEs of which 99 per cent are micro-enterprises while small and medium enterprises constitute about 0.52 per cent & 0.1 per cent respectively. They contribute 30 per cent to the GDP and most importantly employ 111 million individuals as the working force. Thus, an assured path to accelerate the pace to achieve the $5 trillion economy goal lies in the growth of SME/MSMEs. That will enable the dual goal of not just accelerating growth but ensure ‘no one is left behind’ in the success story. This budget should not miss to address the concerns of this section.

The first challenge is to get registered the micro/small and medium enterprises. Currently, 13.5 million units are registered on the Udyam portal. The budget to provide mechanism for linking of urban database of street vendors and shops will enable faster registration and better targeting. This repository will enable to understand the specific needs and issues related to the group and coverage of schemes for better skilling, exposure and adoption of new technologies, credit access and enable them to expand their markets by resorting to standardization and immediate market feedback mechanisms.

1. Market expansion by using new platforms like e-commerce is the new panacea, but an issue related to compliances and GST still remains. The compliance burden and differential approach to the threshold of 40 lakh to offline and online is major disincentive for these enterprises to expand their markets and businesses. The 1 per cent TDS on line along with 1 per cent of GST results in an additional expense of 2 per cent.  It is evidenced that adopting an e-commerce platform also enhances their margins and therefore better liquidity. The GST harmonization is the immediate need with single slab of 5 per cent to micro and small enterprise and 12 per cent for medium enterprise with an exemption to those with turnovers of less than 2 crore. 

2. Policies for export need to focus more on small and medium enterprise along with ease of mechanisms and paper work & also MSMEs need a fund created of Rs 3000-4000 crore to encourage and handhold so as to broaden the export avenues. 

3. Easier line of credit with easier access can get maximum subscription if the urban development and MSME work in sync through database, ensuring better targeting and open up flow of working capital as it gets choked due to delay in payment realizations and supply chain. There is a need for credit guarantee scheme and convergence between e-Shram, Udyam, National Career Service, ASEEM portals. There is need to extend the PLI scheme for MSMEs to expand their business and explore new avenues. 

4. The issue of declaration of NPA as SMA 1 and 2 triggers on the 31st day of a month. The auto declaration of NPA needs a relook as Asset Subordinate Guarantee scheme is yet to attract more subscribers. The Rs 20,000-crore Credit Guarantee Scheme for Subordinate Debt (CGSSD) launched in June 2020 to support stressed MSMEs or non-performing asset (NPA) accounts is yet to attract a sizeable number of potential beneficiaries. In fact, the beneficiary count has dropped 37 per cent from a mere 473 in the financial year 2020-21 to 298 in FY22. The total beneficiary count under CGSSD stood at 771 as of March 2022. According to the MSME Ministry’s FY22 annual report, the scheme had extended guarantees to distressed enterprises amounting to Rs 81.78 crore to 756 borrowers as of December 31, 2021, indicating only 15 new beneficiaries were added till March this year. Thus, a relook is the need of the day.

*The Hurry to declare NPAs

The mechanism for declaring NPAs should be restructured. At the moment banks declare retailers, sellers, traders and wholesalers with 90 to 180 days of unpaid loans as defaulters, instead of declaring their loans as NPAs.

When issuing loans or setting up interest rates, banks do not treat trading businesses on a par with manufacturing activity. In contrast with banking loans available to businesses, high unjustified collateral pledge requirements, greater ratios of capital to loan and interest rates, etc., are demoralising and produce relatively high NPAs for banks, whereas dealers generate very low NPAs. The MSMEs are eligible for more manageable loans. 

The Insolvency and Bankruptcy Code is a valuable tool for resolving the lenders' obligations within a set time frame. We advise treating traders equally with manufacturers in terms of loan size and interest rate, and granting working capital loans based solely on the company's annual revenue without the use of collateral security. Banks should offer credit to the trading sector at a minimum of one per cent, or five to six per cent, over the RBI Repo rate, which is now 11 per cent to 12 per cent. At this rate of interest, no transaction can flourish or continue to grow. Moreover 90 days of unpaid loan if the (Retailer/ Seller/ Traders & Wholesaler) is unable to pay the interest on their bank loans, puts them on the defaulter list.                          

*GST issues

The GST compliance process has remained cumbersome for retail traders and it is a huge burden. Simplifying the process will help with the Ease of Doing Business in a great way. The Return date should be extended by one day if the due date is Sunday, since there are two due dates in a month and it is very hard on dealers.

The cut-off date for ITC in GSTR-1 should be extended to the 19th instead of the 11th of the month since there is no revenue loss to the department but it is very harmful to stop the ITC of purchasers on the 11th, even though the GSTR-3B date is the 20th of every month. The dealers should be given at least 90 days to clear the mismatch.

The bank and market interest rate is decreasing day by day, so the interest rate in GST should be reduced to 12 per cent from 18 per cent, which is a very harsh and old rate. There were so many mistakes in the initial five years of the GST and these were not evasion of taxes, hence the amnesty scheme should exist to make suitable corrections and avoid the many notices.

The restriction of setting off IGST First completely from CGST, even though the dealer has a sufficient credit balance in the SGST, is creating imbalance in the Credit ledger of the dealer. Suspended registration should be automatically revoked after filing of all the returns by the dealer and it is in the law, but GSTN has not started as yet.

In the GSTR-10 the final returns of the maximum late fees are Rs 10,000.00 as most of the time this return is nil, but many retailers, sellers, wholesalers have failed to file it. The GSTR-9 should be made more useful since final assessment is made with the help of this Annual Return but it is not very useful for final assessment and a lot of notices have to be issued to make the final assessment and it has made the Assessment procedure so much more cumbersome. The annual return should have a column where a dealer can file his explanation.

There should be a further relaxation in Section 16(4) to make the ITC available till filing of annual returns. It was a practice in VAT and if the same is given here, then it will be a great relief to the dealers and it will be no loss to revenue but if it is restricted, then it will be a double burden on the dealer.

E-Invoice is visible on the GEPP Portal only after three days’ post the generation date.  After three days there is no facility to print or get a copy of the E-Invoice from the GEPP Portal. This technical restriction needs to be solved. Functionality of transfer of the cash ledger balance from one distinct person to another distinct person i.e. GSTIN with the same PAN has not yet started on the GST Portal. The SOP needs to be issued for the GST registration application.

To avoid compliances of Form GST ITC-04 the principle manufacturer has started manufacturing on its own, which is taking away jobs of the artisans. The sector and the customer will benefit greatly from the implementation of a reduced GST for consumer durables and the reduction of compliance expenses. Additionally, the retail industry anticipates the introduction of a National Retail Policy, which will entail supporting current technology and quick infrastructural assistance in order to facilitate modernisation and digitisation.

*Predictive pricing should be regulated      

Selling prices at both online and offline platforms should compulsorily be made the same, to avoid diversion of sales. The products marketed online should be different from those marketed in the distributive trade. Every manufacturer or brand should be asked to manufacture a different line of articles, with different specifications, with different article numbers for both online and offline platforms. 

 Manufacturers and brands should be directed to not keep their MRPs inflated, to give heavy discounts, since it misleads the consumer and he refrains from buying from offline stores, seeking the same discounts. 

Manufacturers are setting unrealistic targets for distributors, and pushing stocks, forcing them to sell at a loss. It has to be mutually agreed upon, considering the market potential from time to time. Manufacturers are squeezing credit facility to the distributors, but forcing them to sell on credit to create a wider market to increase their sales. It should not be forced. 

Manufacturers and industries are often seen supplying to consumers directly at a much cheaper price sometimes, than to the distributors, causing loss of face to the distributor as well as sales and profits.

*Miscellaneous issues 

*Collateral Free Loans – All traders are cash strapped today and need infusion of funds to start business activities. In this regard, we suggest that the traders be provided collateral free loans. The amount of credit can be based on the average of the taxes paid by the business entity over the last ten years. This will assure the lenders of the genuineness of the traders and ease any apprehensions that they may have.

*Restructuring of interest rates by banks as per current RBI rates – Most loans provided by the banks have a fixed rate of interest which is decided at the time of loan disbursement or renewal. The RBI has lowered the rates and therefore, interest rates should be lowered by the banks forthwith. However, the ground reality suggests otherwise, as per feedback received from the trading community. It is therefore, desirable that banks be instructed to lower interest rates immediately as per RBI guidelines. The immediate lowering of interest will greatly help traders with their financial outlook.

*Lowered Interest Rates ─ Small and medium scale traders are most often the critical link or backbone in the distribution channel of goods and services. They hold stocks to cater to the end consumer and often carry greater credit risk than that of the manufacturers. Probably due to this, banks and financial institutions offer loans at a higher rate of interest compared to manufacturers. In spite of this, trading communities have far fewer NPAs in comparison to others.

*Abolishment of RTGS and NEFT Charges on 1 July, 2019

The Reserve bank of India, with a view to push digital transactions, had asked banks not to charge their customers for RTGS/NEFT transactions. In reality, this has not been enforced. Banks need to be advised to provide these services to their customers without any charges.

*Plastic Waste Management Rules (Amendment) 2022 

A recent notification of the Custom Department Invoking Rule 6 of Schedule-II of Plastic Waste Management (Amendment) Rules 2022, on all kinds of products imported in plastic packaging, including pulses, makes it obligatory for such importers to obtain registration with the Central Pollution Control Board (CPCB) and later mandatorily file for disposal of plastic packaging. While the environmental concerns of the Union government are laudatory, this mandatory obligation will create several hurdles in the import of pulses and defeat the goal of Ease of Doing Business. The customs authorities had made it mandatory for importers to obtain Extended Producer Responsibility (EPR) registration on the CPCB portal. In the absence of such registrations, the consignments will not be allowed to be cleared.

Pulses are essential commodities and play a vital role in the country's food and nutrition security. Furthermore, the import requirement of pulses is bound to increase steeply from March 2023.  We strongly plead that importers of pulses be exempted from the mandatory EPR registration. Importers of pulses import cargo in plastic bags and the pulses are sold to wholesalers, processors and retailers in the originally packaged plastic bags. The importers are not involved in the disposal of the plastic bags and it is not possible for them to keep track of the end use of the plastic bags as they change hands multiple times across the supply chain. Hence, importers should not come under the purview of the notification for mandatory EPR registration. Granting the said exemption will also facilitate the Ease of Doing Business and streamline the import of pulses.

Thus, to ensure that the rhetoric of inclusive growth becomes a reality, 2023 is the year to pull the trigger. Resolving the seven issues discussed will enable MSMEs to continue to increase their contribution to the GDP and most importantly, provide sustainable quality employment.  The MSMEs need to be hand-held to enable them to achieve the growth story where ‘no one is left behind’.

Practitioner Development Economist and ex-Secretary GoI