Here How This Financial Year Is Going To Be Different For SMEs
The air is still rife with talks of how Budget 2018-19 was all about rural growth, healthcare, and the small and medium-scale enterprises (the SME sector); how it turned out to be a non-event for corporate India, and how businesses were left disappointed by this government’s final budget before the next general elections.
But the point is – to steal German economist E.F. Schumacher’s words from his seminal book – ‘Small is indeed beautiful’ – at least as far as the Indian economy is concerned. So maybe Finance Minister Arun Jaitley was not altogether mistaken in giving the sector the push he has.
How so? Consider these facts:
- SMEs, the category of business enterprises that Finance Minister Arun Jaitley is accused of providing a leg-up to, account for a staggering 95% of India’s industrial units
- In absolute numbers, they add up to nearly 430 lakh units. This means that just the number of Indian SME proprietors – not employees – is over nine times the population of New Zealand (47 lakh)
- The sector also employs about 40% of India’s workforce, or about 1060 lakh people – second only to the agricultural sector. To place this in perspective: the Indian SME sector employs double the population of South Korea (508 lakh), an advanced economy;
- India’s SME sector also contributes 45% of the country’s total manufacturing output
- Similarly, it accounts for 40% of India’s exports
- And perhaps, the single most significant fact: the SME sector has maintained an average growth rate of over 10%, higher than that of the Indian economy.
Given these facts, it would not be altogether correct to say that the budget was a ‘non-event’ for corporate India, given that there was strong policy support for 95% of India’s industrial units. Little wonder then that Jaitley, when tabling his budget proposals on February 1, acknowledged the sector’s criticality to the Indian economy, and described it as “a major engine of growth and employment generation”.
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So, what were the takeaways for the SME sector from Budget 2018? There were several, and smart entrepreneurs would do well to take advantage of the breaks provided. Let us take a look at these.
First, there was the big tax break: Jaitley lowered corporate taxes for companies with a turnover of less than Rs 250 crores (i.e., SMEs) to 25%. This translates into more revenues for them and gives promoters the financial rope to further hire and increase production. Remember, this is the sector that employs about 40% of the workforce and is a significant contributor to India’s exports.
Second, he relaxed the rules under Section 80-JJAA of the Income Tax Act for two industries – apparel and footwear/leather – both of which boast a high number of SME units. Under the relaxed rules, the two sectors will enjoy tax deductions of 30% on salaries paid to new employees who have been employed for at least 150 days.
Earlier, entrepreneurs could claim deductions under the relevant section on new employees who had been employed for a minimum period of 240 days during the year. The minister’s latest move is aimed at generating employment, but it is also expected to push production capacity expansion.
Third, Jaitley earmarked Rs 3794 crore for credit growth under MUDRA Yojana, a scheme for micro units, and promised to improve online loan sanction facilities for MSMEs to enable prompt decision-making by banks. This is an essential step as bank credit extension to SMEs has been traditionally low. As per the 2017-18 Economic Survey, MSMEs accounted for only 17.4% of the Rs 26,041 billion bank credit extended to the industry, while large enterprises accounted for a hefty 82.6%.
The Mudra (Micro Units Development and Refinance Agency) scheme seeks to enable struggling micro units to start up, establish themselves, or expand their business – through loans as well as skill and technical support. Mudra loans of up to Rs 10 lakh are disbursed through participating banks in the private and public sector, as well as rural and scheduled banks.
Despite its critics, the latest budget has indeed opened a window of opportunity for SMEs to plan big by making bank credit easier. The credit rating agency CRISIL reckons that the budget will directly benefit labour-intensive industries such as food processing, textiles, footwear and leather goods.
What is needed is capital, and if you are an SME entrepreneur or thinking of starting a unit, you can now look at the working capital loans being offered by various banks without any hesitation. HDFC Bank, for instance, provides a range of working capital facilities at your doorstep. You can choose from a variety of customised working capital loans, which may be in the form of cash credit/overdraft, term loans, or letters of credit (LCs).
In fact, HDFC Bank has two products especially customised for the SME sector: Valuedraw and Elitedraw. Valuedraw offers working capital facilities from Rs 10 lakh to Rs 25 lakh against a wide range of collaterals, while Elitedraw provides working capital from Rs 25 lakh onwards.
The government has created space for the private sector to come in and participate in the development of India; there is a lot of scope for SME entrepreneurs in industries such as IT, food processing, tourism, and textiles. Choose your industry, and then select the right bank for your working capital needs.