Mar 02, 2016 08:36 PM IST | Source:

Budget 2016: A lot to cheer for MSMEs and start-ups, says Crisil

CRISIL believes that the Union Budget 2016-17 has taken several measures to support this. Some of the key announcements and allocations made in this Budget that impact MSMEs include:

V Srinivasan

In terms of impact on the Indian economy, the micro, small and medium enterprises (MSMEs) sector is huge. Not only is it the backbone of manufacturing, trading and services, but it is also the largest employment creator after agriculture. Sadly, the contribution of MSMEs to Gross Domestic Product (GDP) has remained stagnant at around 8 per cent in the past few years. The government's emphasis on 'Make in India', 'Start-up India' and 'Stand-up India' was expected to strengthen Indian MSMEs and make them competitive. CRISIL believes that the Union Budget 2016-17 has taken several measures to support this. Some of the key announcements and allocations made in this Budget that impact MSMEs include:

Measures to improve access to funds

One of the biggest challenges faced by micro enterprises, which account for 90% of the MSME sector, is access to formal finance. An analysis of 12,000 CRISIL-rated ones having a turnover of less than Rs 1 crore showed this is the biggest impediment to growth, forcing enterprises to seek loans from informal sources at usurious rates of interest because of inadequate collateral. The Pradhan Mantri Mudra Yojana target has now been increased to Rs 1.80 lakh crore for 2016-17 from Rs 1.22 lakh crore in 2015-16. CRISIL believes the above along with credit growth of microfinance institutions (MFIs) and new small banks will improve flow of formal credit to micro enterprises.

To encourage entrepreneurship, particularly among the oppressed sections of the society, Rs 500 crore has been announced under the Stand-Up India scheme allocated for scheduled castes, scheduled tribes and women entrepreneurs.

CRISIL’s analysis shows institutional finance accounts for only 15% of the working capital needs, and information asymmetry is one of the primary reasons for MSEs not being able to access credit. To address this issue, the government has increased budgetary allocation to the performance and credit rating scheme multi-fold to Rs 200 crore. Under the scheme, which was launched a decade earlier, the ratings of MSMEs are subsidised. The allocation of Rs 25,000 crore towards recapitalisation of public sector banks, though inadequate, will help them support credit growth to MSMEs.

Ease of doing business and taxation challenges of start-ups addressed

• Start-ups face a major challenge in getting themselves registered. The government intends to amend the Companies Act, 2013, to facilitate registration of companies in a single day. And tax holiday for 3-5 years will also be a big booster.
• Reduction in corporate tax rate to 25% (plus surcharge and cess) for manufacturing companies incorporated on or after March 1, 2016, is also salutary.


• Doubling the turnover limit to Rs 2 crore under the presumptive taxation scheme under Section 44AD of the Income Tax Act will bring in larger number of assesses under this category. This liberates MSMEs from the burden of maintaining detailed books of account and getting audit done.

• Reduction in corporate income tax rate to 29% (plus surcharge and cess) for the next financial year for small enterprises with turnover not exceeding Rs 5 crore (in the financial year ending March 2015) is a welcome move.

Job creation and skill development

• The government of India will pay the Employee Pension Scheme contribution of 8.33% for all new employees enrolling in EPFO for the first three years of their employment. The share of contractual employees among CRISIL-rated SMEs in the manufacturing sector was about 30% during 2014 and this could come down significantly if MSMEs move these employees to their rolls. MSMEs can take maximum benefit from this as it incentivises them to recruit unemployed persons and also to bring more workforce under the formal sector.

• The significant investments in Skill India mission through Pradhan Mantri Kaushal Vikas Yojana will enable availability of skilled work force. About 78% of promoters of CRISIL-rated MSMEs in the manufacturing sector are either graduates or under-graduates and therefore, proposal to groom entrepreneurs particularly in remote areas through Entrepreneurship Education and Training is a welcome move.

Author is Business Head, CRISIL Ratings - SME & Real Estate
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