While presenting the Union Budget for 2021, Union Financial Minister (FM), Nirmala Sitharaman said, that the Budget this year would provide every opportunity for the national economy to pick up the pace and grow sustainably. The FM pointed out that this year’s Budget was prepared in an entirely new scenario, while the nation was crippled. She added that the Budget has followed a contraction in the economy only three times and unlike the other times, the situation now was because of the covid-19 pandemic.
Union Budget 2021
The annual Union Budget proposed in the Parliament is keenly followed by all industries. Every year, industries in each sector send their wishlist to the Union Finance Minister. The level of assistance that will be needed in 2021 will be different, as all industries struggle to recover and put one of the worst years behind. However, the economic recovery is expected to take time.
The proposal for India’s Union Budget 2021-2022 rests on six pillars: inclusive development for aspirational India, reinvigorating innovation, R&D and human capital, health and well-being, maximum governance, minimum government, physical and financial capital, and infrastructure.
Recovery from lockdown
In the post-pandemic scenario, this budget has been announced catering predominantly to the needs of small businesses. The damage caused by the nationwide lockdown induced by the pandemic is inarguably deep and long-lasting. The insolvency process and ease of doing business were prioritized as the first-ever digital budget relaxed norms around incentivizing funding for startups and setting up new business enterprises.
On the path of recovery from the stringent lockdown, the government has made several announcements to boost demand and supply. The Atmanirbhar Bharat Abhiyaan is an ambitious scheme, aimed at giving a much-needed push to the domestic industry. This was welcomed warmly by the MSME sector, one of the hardest-hit sectors by the pandemic. However, the sector requires more sustained assistance to be able to get completely back on its feet.
In November 2020, the Government had extended the Emergency Credit Line Guarantee Scheme (ECLGS) to 27 sectors. This measure was a part of the Atmanirbhar Bharat 3.0 package worth Rs 2.65 lakh crore. The eligible entities for the scheme can avail extra collateral free funds up to 20 per cent of their total outstanding credit as a Guaranteed Emergency Credit Line (GECL), fully guaranteed by NCGTC. This improved cash flow and opened up the markets in a big way. The modified scheme encouraged Member Lending Institutions (MLIs) to offer easy loans to MSMEs. Several NBFCs and Fintechs came forward to aid these measures by providing quick loans to small businesses.
Support for the MSME sector
When covid-19 hit, Prime Minister Narendra Modi announced a strict nationwide lockdown that started in March 2020. The MSMEs industry suffered a great deal as the demand was hit, consequently, the global supply chain was disrupted. Due to this, a massive reverse migration among labourers was seen in India. The pandemic has caused the economy to decline drastically. that were seeking game-changing reforms to accelerate their growth back to the pre-Covid era and leverage the Covid-induced tailwinds for digital growth.
To offer relief, the Union Budget 2021-22 announced by Nirmala Sitharaman, India’s Union Finance Minister, has allocated Rs 15,700 crore specifically for the Ministry of Micro, Small, and Medium Enterprises (MSME) sector. This is greater than twice the amount of the previous year. She stated that a handful of measures were being taken to support the MSME sector in this year’s union budget. This has been considered to boost the startup and MSME ecosystems in the country.
With digital payments and fintech becoming more widely accepted in recent times, the government was able to afford to announce some level of support for the creation of a digital payments’ framework. This is expected to give MSMEs quicker and easier access to financial and credit services.
Support for Finance
Availability of credit has continued to be a long-standing issue for MSMEs. Although the government has taken measures in the previous years to grant simpler access to loans for MSME startups, it has never been sufficient.
The FM has proposed to lower the margin money requirement from 25 percent to 15 percent. This has been done to further facilitate credit flow under the scheme of Stand-Up India for women and Scheduled Caste and Scheduled Tribes. Loans for allied activities in the field of agriculture have also been included as part of Financial Inclusion.
However, on account of the pandemic and the lockdown due to it, working capital requirements are expected to change, and the assets and liabilities of MSMEs may need to be reevaluated. By easing up the existing financial system, the finance ministry may be successful in giving MSMEs a helping hand. MSME loan scheme, MSME loan process needs to be refurbished.
The Finance Minister has proposed several other measures to motivate investment by business startups in the country. Some of them include:
Extension of Tax Holiday: The budget announced an extension of eligibility for claiming tax holidays for new business enterprises in addition to capital gains exemption for investment in startups until March 31, 2022.
Boost for Digital Payments: Rs 1,500 crores would be earmarked for a proposal that is expected to grant financial incentives to encourage digital modes of payment in businesses.
Insolvency Resolution: E-courts system will be instigated, substitute approaches to debt resolution and special framework for MSMEs will be announced, and the National Company Law Tribunal (NCLT) framework will be reinforced.
Slashing of Customs Duty: Sitharaman said that duty on steel scrap will be exempted for a duration up to 31st March 2022 to help MSMEs and other small-scale user industries which have been brutally hit by a recent hike in iron and steel prices.
OPC Setup Incentivised: One Person Companies are being encouraged to flourish without limitations on turnover and paid-up capital. The Union Budget also allows the conversion of OPCs into any other type of company, at any point in time.
Exemption on Imports withdrawn: The union budget 2021 announced the retreating exemption on imports of ‘certain’ kinds of leathers as they are domestically produced mostly by MSMEs.
Revising Definition: Thresholds for paid-up capital have been increased from Rs 50 lakh to Rs 2 crore and turnover has been increased from Rs 2 crore to Rs 20 crore to ease the compliance requirements of more than two lakh companies.
Significant measures to support the economic growth of the MSME sector have been announced in this year’s union budget. An overall economic recovery must be crucial for the nation to jump back. By understanding the negative impact of the lockdown on the MSME sector, the government has focused on sustainable means to increase the sector’s competitiveness and progress in the global market.