Volume VIII Part 4 August 25, 2014 16 Business Advisor

SMEs in the Union Budget 2014-15:

Implementation challenges

Dr B. Yerram Raju

This path-breaking Union Budget providing discontinuing

continuity on several fronts has concretised all the

promises in the BJP manifesto unfolding the vision of the

Modi Government. Its allocations reflect pragmatism in

that some projects got funds for Detailed Project Reports

while others of long term nature that can only make a

beginning got symbolic outlays.

Manufacturing sector that is just showing signs of revival

with its growth rate touching 4.7% in May 2014 reversing

the negative trend of growth till the end of March 2014 got a shot in the

arm. Of particular relevance is the attention paid to the MSME sector.

This highly heterogeneous MSME sector in terms of the size of the

enterprises, location, variety of products and services, people employed,

coverage of social sector, and leveraging information, communication and

technology (ICT) in running their enterprises holds nearly 30 lakh units

employing around 500 lakh persons. 98 percent of them are in micro and

small categories going by the definition of the MSME Development Act,

2006. They have always reflected growth rates ranging from 8 to 11 percent

far higher than their elder cousins.

While Rs 10 crore investment in large enterprise provides one job or less, Rs

one crore in MSMEs provides on an average 4 jobs. They are also providing

on-the-job skills and tolerate attrition rates multiple times the large

enterprises while contributing to 40 percent of exports in manufacturing

sector.

Most of them are in debt markets and are unable to access equity despite

While a Rs 10 crore investment in large enterprise provides

one job or less, a Rs one crore investment in MSMEs

provides, on an average, four jobs.

Volume VIII Part 4 August 25, 2014 17 Business Advisor

the SME Exchange in position.

The three key issues facing the sector, viz., lack of finance, need for support

for technology/ skills and innovation and need for exit option, get due

attention.

While the schemes are well-intentioned, the implementation at the State

level will be critical and would require State Governments to overhaul their

machinery to take full benefits from these measures. Succinctly put, Arun

Jaitley announced the following for the MSMEs:

1. Fund of Funds with a corpus of Rs 10,000 crore for providing equity

through venture capital funds, quasi-equity, soft loans and other risk

capital will facilitate startup companies.

2. Initial sum of Rs 100 crore for “Startup Village Entrepreneurship

Programme” for encouraging rural youth to take up local entrepreneurship

programmes. Read with the support for producer companies, this is a big

shot in the arm.

3. Corpus of Rs 200 crore to be set up to establish Technology Centre

Network. Successful execution of all these promises will give a significant

boost for entrepreneurs and SMEs and facilitate the promotion and

development and enhancing the economic growth of the country.

4. Promised to develop an entrepreneur-friendly legal bankruptcy framework

for SMEs that will enable easy exit.

5. To incentivise small entrepreneurs in the manufacturing sector, the

Volume VIII Part 4 August 25, 2014 18 Business Advisor

government has also proposed to provide investment allowance at the rate of

15 percent to a manufacturing company that invests more than Rs 25 crore

in any year in new plant and machinery for investments up to 2016-17.

6. Definition of SMEs would be modified.

7. A nationwide “District level Incubation and Accelerator Programme” to be

taken up for incubation of new ideas and necessary support for accelerating

entrepreneurship.

However, once an entrepreneur sets up a unit in the sector, it is well-nigh

impossible for him/ her to exit under the existing rules. The MSME

Development Act, 2006 has not been able to create a window for safe exit.

It is this context that makes the announcement on exit policy and

bankruptcy law greet with lot of enthusiasm. This measure will eventually

distance them from the endemic sickness.

Some of these proposals like MSME tool rooms and innovation centres that

are already present in most large cities unless implemented to be enterprise-

friendly, would bring wrinkles on the already sweating brow. Similarly,

entrepreneurship development programmes conducted by all State

Governments and EDIs and MSME DIs, are not able to generate proposals/

projects that are bankable. Finance still holds the key.

Still, MSME sector faces all its problems at the State and sub-State levels

where actual implementation mechanism rests. The District Industries

Centres, save exceptions like Tamil Nadu and to some degree in Karnataka,

Volume VIII Part 4 August 25, 2014 19 Business Advisor

Gujarat and Maharashtra, are a window of harassment and the single-

window scheme for securing all clearances has multiple doors and windows.

The archaic DICs have to be converted into District Facilitation Centers in

the first place if good governance has to touch this recognised distressed

sector.

The other implementation block is delayed release of announced subsidies

both from the Central and State Governments.

Third, State Government machinery needs to be trained for the magnitude

of work expected from them and also their knowledge levels/ familiarity with

technology, bankability of schemes etc., has to significantly improve. Here,

the Ministry of MSME can play an important role to ensure that the State

Governments are ready to implement Budget proposals.

RBI, in its guidelines, provided for collateral free credit to these MSMEs up

to Rs 10 lakh although the Credit Guarantee Fund Trust for MSEs provided

for such access up to Rs 100 lakh. It is a different issue that banks follow

neither, save very few exceptions, going by less than a lakh of lucky MSEs

securing collateral free credit.

RBI has also advised the banks to display the facilities available to the

MSME sector including the guarantee thresholds in the banking hall and

there is clear breach on this count with no regulatory action.

There is no mandatory percentage of priority sector credit to flow to this

sector. The credit issues and rules and regulations are expected to be

examined by a committee and the three month speedy delivery of its report

would hopefully be followed up with equally speed implementation

mechanisms.

Budget certainly made the MSMEs smile this time, as environment for

enhancing their competitiveness improves significantly.

(Dr B. Yerram Raju is an economist and risk professional.)

The archaic DICs have to be converted into District

Facilitation Centres in the first place if good governance has

to touch this distressed sector.