Impact of Budget 2018 on MSMEs

By Finance, 3EA
Impact of Budget 2018 on MSMEs

Report on the Impact of Budget 2018 on MSMEs


For any economy around the globe, there are several typical revolutions that took place since 17th century and still are, which completely changed the scenario of business and economic development so far. These reforms were related to the objective of relevance from time to time starting from Agricultural development to industrial development and then to the growing service sector. For India in particular, it witnessed the one of the greatest reforms in 1990s apart from the 5 year plans of planning commission, the economy of India starting taking off, driven by the economic reforms like LPG (Liberalization, Privatization and Globalization) which induced the further introduction of various policies and laws which contributed to India’s growth.

One of the key focus was to change the position of industries altogether. Industries being one of the sectors having significant contribution to the India’s GDP, it was always important to introduce and implement changes time to time. In addition to that, industrial sector employed a significant labor force being as a source of employment (for both skilled and unskilled labour), as an import substitution, low cost alternative with a move to bridge the trade deficit further increasing both foreign exchange and capital inflows. So, in short it was and has always been a sector aligned towards improving the standard of living of the populace. Some of the relevant laws and reforms includes Indian companies act, FERA-FEMA, Tax reforms, Computerization, De-licensing and Decentralization, MSME act etc. which induced changes in industrial processes and operation so far with more recent schemes includes Startup trend, make in India initiative, Digitization, increasing planned outlay dedicated for industrial development, Mudra Yozana, skill India programs etc.

MSME act:
It was a law which came into being in 2006 to standardize and organize the industries and their operation by clearly demarcating the industries based on the scale and scope into micro, small and medium enterprises for both manufacturing and service industries.

Definition of MSMEs in India

(As Per Micro, Small & Medium Enterprises Development (MSMED) Act, 2006)

Manufacturing Enterprises - Investment in Plant & Machinery
Description INR USD($)
Micro Enterprises upto Rs. 25 Lakh upto $ 62,500
Small Enterprises above Rs. 25 Lakh & upto Rs. 5 Crore above $ 62,500 & upto $ 1.25 million
Medium Enterprises above Rs. 5 Crore & upto Rs. 10 Crore above $ 1.25 million & upto $ 2.5 million

Service Enterprises – Investment in Equipments
Description INR USD($)
Micro Enterprises upto Rs. 10 Lakh upto $ 25,000
Small Enterprises above Rs. 10 Lakh & upto Rs. 2 Crore above $ 25,000 & upto $ 0.5 million
Medium Enterprises above Rs. 2 Crore & upto Rs. 5 Crore above $ 0.5 million & upto $ 1.5 million

Current scenario of SMEs in India
Industries in India contributes close to 28 % to its GDP, which is very significant. More than 50 million SMEs exist currently and over the last five decades, the SME sector has grown dynamically by contributing 40% of the country's exports and creating millions of jobs annually. Considering industry-wise presence; the manufacturing industries majorly are into production of commodities, heavy machinery and heavy capital industries, mining industries respectively whereas on the other hand, the service industries are mostly into Telecom, transport, travel, healthcare Etc. respectively.

Above picture depicts the overall presence of SME statistically both geography-wise and size-wise. It is apparent that it is a sector which is the backbone and driver of growth for Indian economy with significant contribution to GDP and fostering entrepreneurship and innovation, numerous initiatives by our Government have always been the highpoints. 

Budget 2018 key-highlights for SMEs:

Considering the SME relevant budget specifics, Govt. has planned to introduce a series of measures for (MSMEs), with

  1. First one being lowering the corporate tax rate to 25 per cent for businesses with a turnover of up to Rs 250 crore.

  2. Set a target corpus of Rs 3 lakh crore dedicated for lending under the MUDRA scheme in 2018-19 which almost 20% more than what was allocated in last year's budget i.e. 2.44 lakh crores.

  3. A provision of Rs 3,794 crore has been set aside for MSMEs, to provide credit support, capital and interest subsidy and innovations to the sector as contingent corpus for planning and development.

  4. The announcement of 12 per cent EPF in wages towards new employees in all sectors is expected to lead to more number of formal job creation, experts said

  5. The Budget proposed an outlay of Rs.7148 crore for the textile sector in 2018-19 as against Rs.6,000 Crore in 2016.

  6. The Budget Revised Estimates for expenditure in 2017-18 are Rs.21.57 lakh crore (net of GST compensation transfers to the States) as against the Budget Estimates of Rs.21.47 lakh crore.

Year Resources Transfered To States In Crores
2015-2016 834,483
2016-2017 985,674
2017-2018 1,115,877
2018-2019 1,269,435

  1. Proposition of 100 percent deduction to companies registered as Farmer Producer Companies with an annual turnover upto Rs. 100 crore on profit derived from such activities, for a period of five years from financial year 2018-19.

Short term and Immediate Impacts

  1. Reduced Tax burden-

    Owing to change in corporate tax, it is mentioned that, this move will benefit 99% of companies and the revenue foregone is pegged at Rs 7,000 crore in 2018-19. After this, out of about 7 lakh companies filing returns, only about 7,000 companies will remain in 30% tax slab

  2. Increase in the number of agro-based industries-

    2) Due to intensified focus from the Govt. and increase outlay for agricultural development in this year's budget with newer initiatives like operation green, increased institutional credit for agriculture, farmer producer companies and organizations expansion, it is quite likely that there will be new agro-based industries coming up in the future.

  3. Quicker financing options and ease of cash flows -

    Increasing drive towards making availability of funds for SMEs development and growth, as they can approach to any bank or financial institution seeking for funds needed for carrying out their businesses and any such capital requirement. Financing and credit appraisal has now become faster as there is no need to pledge any secondary security- collateral, with significant reduction in documentation and paperwork. Some of the newer loan types includes vendor financing, dealer financing and better cash-credit arrangements.

  4. Employment generation-

    With more and more new startups coming up along with the expansion of existing MSMEs would create more number of jobs at a time when job opportunities in India are already scarce. As these startups grow further will bring with itself the involvement of major chunk of the labor force with itself.
    Budget 2018-19 would generate self-employment opportunities through establishment of about 88,000 micro enterprises in the non-farm sector, providing employment to around 7 lakh people. This is further strengthened by the initiative of the Govt. to contribute 12% of the wages of the new employees in the EPF for all the sectors for next three years. The estimated revenue forgone during Financial Year 2018-19 will be Rs. 7,000 crore. This lower corporate income tax rate would leave such companies with higher investible surplus, which would create more jobs.

  5. Growth in key focused areas-

    Defense and textile are two of the most emphasized sectors for which the Govt. has increased its planned outlay 2.95 lakh and 7148 crores. And thus seek to invest more towards expansion and development in these two sectors.

Long term impacts

  1. Less likelihood on loan defaults-

    With reduction in taxes and more emphasis on providing easier finance to the SMEs through MUDRA schemes, Startup India, Make in India schemes corpus and funds, these industries would be having higher investible funds in future and high availability of these funds would enable them to continue improve their output and business which further will lead them to pay their loan outstanding installments, dues and such repayment on a timely basis. So, there would be lesser chances of defaulting on the loans borrowed by the SMEs.

  2. Formalization and Big-data-

    With so much changes happening recently starting from Make In India to GST, there is continuous building up of humongous databases of the MSMEs business and finances leading to the big data of information which would be useful in the improvement of financing of MSMEs, capital requirement including working capital, better credit assessment etc.

  3. Improved standard of living and Direct benefit to the employees of MSMEs-

    Contribution of 12% to EPF for new employees for three years by the Government in sectors employing large number of people like textile, leather and footwear would directly induce an increased income/salary to the people.

  4. Increased R & D expenditure and Innovation driven industries –

    With ready availability of funds almost all industrial firms in the future can resort to more and more investment in research activities, adoption of new technologies, leveraging on the e-commerce trend etc. to improvise on various products and service features enabling them to gain market control and market leadership.

Considering these short term and long term impacts which are on the positive lines there are also some concerns which these MSMEs are facing some of which includes inadequate marketing facilities which tends to be little challenging, apart from this there are some regulatory policies and permits which to some extent impacts the business of the MSMES.

But with a significant rise in technology and innovation, a business-friendly atmosphere with increasing support from the Govt., the SMEs will have a path towards sustainable growth and development.

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Article by: Finance, 3EA