Ease of Doing Business for MSMEs: The industry has learned to work with the pandemic as governments have steadfastly stayed away from general lockdowns, although there are restrictions on service industries like restaurants, malls, theatres. The MSME sector has borne the brunt of the pandemic and is reeling due to multiple issues.
By R Srinivasan
Ease of Doing Business for MSMEs: Finance Minister Nirmala Sitharaman would be presenting the Budget on February 1, 2022. It would be critical to see whether the budget addresses the concerns of the MSME sector. On July 27, 2021, the Parliamentary Standing Committee on Industry observed that “the stimulus package announced by the Government for the economic revival from the Pandemic hit economy has been found to be inadequate as the measures adopted were more of loan offering and long-term measures instead of improving the cash flow to generate demand as immediate relief. In the process of economic recovery post-first wave of the Pandemic, the second wave even more vigorously ripped the economy, particularly the MSME Sector. The committee, therefore, recommends that the Government should immediately come out with a larger economic package aimed at bolstering demand, investment, exports and employment generation to help the economy, including MSMEs to recover from the Pandemic fall-out.”
We are in the midst of the third wave and many things have changed since the report was presented. The industry has learned to work with the pandemic as governments have steadfastly stayed away from general lockdowns, although there are restrictions on service industries like restaurants, malls, theatres. The MSME sector has borne the brunt of the pandemic and is reeling due to multiple issues. Some key concerns that need the attention of the policymakers are:
- Raw material prices have gone up significantly affecting the cost of goods manufactured. The MSMEs rarely have the negotiating power to effect corresponding price increase. This has affected gross margins. While large companies are reporting bumper profits, the MSME sector is stressed.
- Diesel is a key component to keep manufacturing industries working through the week since many MSME clusters have weekly power shutdowns. With the price of diesel galloping, the cost of energy consumption has gone up by over 15 per cent affecting the cost of manufacturing. There is a need to look at the state level and central taxes levied on fuel to alleviate stress.
- Diesel is also a key component of transportation and logistics. MSMEs usually bear the cost of logistics adding to the overall cost of operations and affecting margins.
- MSMEs contribute significantly to the overall exports of the country. The shipping and logistics costs have gone up, in some cases by almost three times due to the shortage of vessels. This is accentuated by the shortage of containers since the circulation is affected due to lockdowns in various ports. MSMEs that have entered into CIF contracts are stuck and are losing money. While most logistics operators believe that this is a temporary phenomenon and the market forces will correct the prices, when this will happen is anybody’s guess.
- Labour shortage has led to an increase in the cost of labour. Despite the willingness to pay, labour shortage continues to plague the MSMEs. This has again increased the cost of operations affecting profitability.
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In this scenario, what do MSMEs look forward to from the budget? A significant cut in corporate taxes so that they are able to tide over this period. In fact, Finance Minister would do well to reduce corporate taxes to zero for MSMEs with a turnover of less than Rs 50 crore, this would be a huge relief. The government should work in tandem with states to reduce taxes on fuel. There are many reports of closures and consequent job losses as well. MSMEs are the largest employers, particularly in rural areas and is the most resilient sector of the Indian economy but the pandemic has tested it to the limits. This is the time they need real support.
R Srinivasan is the Director and Co-founder at AIRA Consulting. Views expressed are the author’s own.
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