Interest subsidy to MSEs can lead to rise in indirect taxes

Giving interest subsidy to micro and small enterprises (MSEs) can lead to nearly three-time rise in indirect taxes for the Government, according to a report by rating agency Crisil.

Those getting rated for four years also enjoy 75 bps lower rates, the report said today.

As per the report, Rs 1 crore of interest rate subsidy to MSEs can generate nearly thrice as much in indirect taxes, create 38 jobs, and also increase revenue and profitability of MSEs - and all of it in the near-term.

It means that to create 1 lakh jobs and generate indirect taxes of Rs 8,400 crore, the corpus of interest rate subsidy required would be Rs 3,000 crore. That will also go a long way in mitigating job losses and business stress seen in the sector of late.

"We see two ways in which the Government can completely change the game for the MSE sector. One, by offering direct interest rate subsidy between 1 percent to 4 percent depending on performance and credit rating scheme (PCRS), and two, by subsidising annual rating reviews for 3 to 5 years," Crisil SME Ratings business head Manish Jaiswal said in a statement.

"These steps may seem like giveaways, but are actually very revenue positive for the government," he added.

PCRS has been a very successful scheme with more than 1.25 lakh MSEs getting themselves rated since 2005. It has also helped lenders identify the better-rated MSEs, which improved their asset portfolios.

But an enduring drawback of PCRS is that it doesn't offer subsidy support for re-rating and annual reviews of ratings. That is the reason why more than 90 percent of the MSEs do not seek a re-rating the report said.

A separate analysis of 1,583 MSEs across the country showed those getting rated for a four-year period saw their average cost of borrowings falling 75 basis points because ratings had induced financial discipline and improved credit profiles.

It also improved MSE access to growth capital and facilitated 70 percent higher borrowings.

Revenues of these rated MSEs increased at a compounded annual growth rate of 16 percent and net profit by 14 percent, well above the 5.5 percent growth in topline and 2.6 percent in net profit recorded by 1,138 large companies (excluding BFSI, oil & gas, and adjusted for extraordinary and non-operating income) listed on the National Stock Exchange since fiscal 2013.