MSMEs, Infrastructure, Energy and Agriculture: Top Expectations from the Upcoming Union Budget 2023-24

According to Dr. Arun Singh, Global Chief Economist, Dun and Bradstreet, here are some important set of demands or expectations that the Indian MSME sector is expecting from the upcoming Union Budget:

1. Support to MSMEs for job creation: The long-standing issue of delayed payment to MSMEs needs to be addressed on strong footing. Payment delays to MSME suppliers remains an endemic and intractable problem in India. Payments when delayed to MSME suppliers by their larger buyers hinders not just the viability and growth of MSMEs, but overall competitiveness of the Indian economy. An estimated Rs10.7 trillion i.e., 5.9% of the Gross Value Added (GVA) of Indian businesses is locked up annually as delayed payments from buyers to MSME suppliers. To address delayed payments at scale the government can undertake the following measures

• Run a ‘Prompt Payment Program’, which brings together the 100 largest corporates in India to commit to becoming prompt payers.
• Mandate that all Miniratnas, Maharatnas, and Navratnas transact on TReDS.
• Encourage these corporates to engage in ‘deep-tier’ financing to unlock working capital for smaller MSMEs beyond their immediate supply chain
• Allow MSMEs to opt-in to the services of an information utility, which will independently take action against tardy or delinquent buyers on behalf of the MSME. Currently leveraged by the insolvency and bankruptcy ecosystem of India, the UK Sinha Committee recommends that it be adopted across the MSME ecosystem as well.
• Add delayed payments as an indicator within the Ease of Doing Business (EoDB) 2.0 framework which is currently under development by the Department of Promotion of Industry and Internal Trade

Given that interest rates are increasing rapidly, support in the forms of interest subsidy (Interest Equalization Scheme) can be hiked from 3% to 5% for MSME manufacturers, and from 2% to 3% for merchant-exporters as existed prior to October 2021. Given that input prices/ inflation has reached decadal highs, exporters may be provided automatic enhancement in credit limit on a case-to-case basis without the need of collateral.

Given that external demand is expected to remain weak, the benefit given to exporters that was given during the pandemic year of 2020 must be reconsidered i.e., the period of pre-shipment and post-shipment export credit sanctioned by banks from the existing one year to 15 months as was given during the pandemic. 

Since 2018, import tariffs for several product categories have been raised. All such protection should be accompanied with a ‘sunset’ clause and the government should gradually phase out of import tariff. This will improve the competitiveness of domestic MSMEs. The One District One Product concept needs to be supported by sufficient infrastructure by the District Industries Centers. The government should also facilitate cross border e-commerce and provide the same benefits as applicable to conventional exports. 

2. Climate change and energy transition:  Given the commitment to achieve net zero by 2070 at the COP27 summit in 2022, the government can initiate a discussion of imposing a green tax in the Union Budget. This would send out a positive signal to the global investors especially in the developed markets. On the other hand, the government can also formulate incentives to lure global and domestic investors for green financing, especially, in infrastructure which will also establish India’s credibility in its efforts towards achieving its climate change target. There could be renewed focus to increase the pace of energy transition in the Budget.

3. Infrastructure

Quality of infrastructure spending: To commit to more capex amidst fiscal consolidation would require the government to identify and rationalize some of the non-priority spending. We expect Centre to continue to allocate long-term capex funds for states. While the government had announced Rs 1 trillion, 50-year, interest-free capex loans to states in the last Union Budget, it is important to nudge states to increase their capital spending. While 20% of the above fund was linked to state reforms, the governemt could similarly earmark a section of the fund allocated in 2023-24 towards spending on green infrastructure. 

Time to revitalize the Rurban mission: Creating new growth centres would be imperative to achieve the goal of becoming a higher upper middle-income country. To achieve this, rural infrastructure will have to be upgraded to enable market linkages and logistics. The Rurban mission which aims to develop rural and peri-urban areas has gained traction only in few states since its launch in 2016 and therefore needs new incentives. Mechanism to improve lack of coordination between the central and state governments for such projects and allocating a dedicated fund to accelerate the initiative would lead to rural infrastructure development and create job opportunities.

4. Agriculture: Given the challenges in food and fertilizer that the world witnessed due to the geo-political crisis, the budget might place emphasis on these two areas. In the agriculture sector, incentives for investing in post-harvest material handling and processing, improved farming practices associated with organic farming and adopting sustainable agricultural practices to lower carbon emissions could be the focus areas.  

Farmers in 2021 as well as 2022 had suffered huge losses owing to the skyrocketing fertilizer prices driven by the Russia Ukraine war. Given India’s dependence on imports for fertilizers and the huge subsidies that had to be given to farmers in 2023, more reforms are required in the sector. The government could formulate appropriate incentives for using conventional fertilizers with viable bio-fertilizers, encourage practices that rationalize use of fertilizers and promote best practices and newer technologies.