Will the Budget 2012 give MSME sector a boost?
V.K. Agarwal: It offers a mixed bag for the sector. While the Budget is generous to the larger sized units of MSME sector, for bulk of the micro segment, there is little substantive other than a regulatory ease offered by extending limit of mandatory audit from Rs. 60 lakh to Rs. 1 crore.
Were your expectation met from this year's budget?
V.K. Agarwal: Well, many are not met. We were expecting some follow-up measures on operationalizing the cabinet decision for making all central government related institutions to procure 20 percent of goods and services from Micro and Small Enterprises. We also expected some fiscal measures to boost the fledgling SME exchange. We found it rather surprising that Finance Minister mentioned both the issues, but chose no action. Pressing MSME issues as access to credit and marketing support did not even find a mention.
Access to adequate finance has always been a constraint for MSME sector. Do you think the budget has provided enough fund for this sector in this next fiscal?
V.K. Agarwal: One bold initiative in the Budget is the announcement of Rs. 5000 crore India Opportunities Venture Fund (IOVF) to address the ‘Risk Capital needs’ of the relatively larger segment of MSME sector. In our opinion the reach of the risk capital can further increase manifold if the fund is also used to subscribe to other VC funds. Secondly, a tranche out of the fund could also be created for subscribing to IPOs on SME exchanges.
However, the budget seems to have taken away the benefit from larger MSME segment (given through IOVF), by proposing to restrict investment in MSMEs by imposing a tax at the rate of 30 percent on any investment received by closely held companies where the aggregate investment exceeds the fair market value of shares.
The move is not in sync with ground realities in India. We feel that what is missing in the budget is some bold initiative to address the ‘credit needs’ of the smaller of MSME segment- micro and small enterprises (MSEs). A similar large sized fund could have been initiated to create a challenge fund for inviting setting up of MSME dedicated banks with strong capital base; to encourage factoring companies, and to create a bond/MSME debt market out of securitization of trade receivables.
The government has extended the weighted deduction of 200 per cent for R&D expenditure in an in-house facility beyond March 31, 2012 for a further period of five years. How much benefit this will bring for the MSME sector?
V.K. Agarwal: The move is surely welcome. As a matter of fact there is a need to take more liberal view by expanding the definition to cover expenditure incurred not only in ‘in-house facility’ but also fee paid to external Government labs such as of CSIR, IITs etc.
As we know that R&D initiative is lacking in India. What was your expectation for the MSME sector?
V.K. Agarwal: Because most MSMEs might not have in house R&D facility, the weighted deduction could not be used much by MSMEs. That is why expanding scope of definition will give a fillip to MSMEs to tap external knowledge sources. As the unit has to identify the problem, seek assistance from recognized lab and then pay for it, this market based mechanism should prove more efficient than giving subsidy.
Do you think the budget 2012 is more focused to bring down fiscal deficit?
V.K. Agarwal: The key assumptions on which the Budget rests are related to management of political economy. It would require greater determination to adhere to the targets that the Finance Minister has set for himself.
The government did not focus much on the manufacturing growth of the country. Do you think the government should have taken a strategic view on the needs of the manufacturing sector?
V.K. Agarwal: I agree absolutely. The Finance Minister seems to have stopped at highlighting the importance of manufacturing and taking but only a few ad-hoc measures to demonstrate his willingness in following-through the promise. The Budget just made passing remarks on the GST, National Manufacturing Zones, SME Exchange, 20% mandatory procurement from MSEs in public procurement, etc.
According to FISME, he needed to have taken a strategic view by having an investment friendly import duty structure, especially after prolonged and substantive discussions in Planning Commission with stake holders on impulsing manufacturing.
There is an increase in Excise Duty and Service Tax from 10% to 12%. How much impact will this bring to the MSME sector?
V.K. Agarwal: Given that reduction of duty was a temporary measure, the increase was inevitable and expected. I think interest rates and inflation are greater factors that will determine demand than a change of duty to the tune of 2%.
(Namrata Kath Hazarika can be contacted at email@example.com)
The Economic Times