Union Budget 2021: Extension On MSME Schemes

In light of the COVID-19 pandemic, the Finance Ministry had launched the Emergency Credit Line Guarantee Scheme (ECLGS) as a part of the Atma Nirbhar package on 12 November 2020 to fillip growth in India’s MSME sector. Under this scheme, the government proposed Rs. 20,000 crore debt provision and equity infusion worth Rs. 50,000 crore. Moreover, Finance Minister, Nirmala Sitharaman made tweaks to the small-scale enterprise’s definition to benefit a larger percentage of businesses.  Indian MSMEs relied on Union Budget 2021 to bring additional measures for this sector’s revival, especially regarding liquidity crunches faced by a majority of this sector’s components. Let’s look at some key expectations of India’s MSME sector from this year’s union budget. 

Critical Expectations From Union Budget 2021

Here are some key expectations of small and medium-scale organisations from this year’s Union Budget:

• Extension Of Emergency Credit Line Guarantee Scheme 

Before the presentation of this year’s budget, the government had already extended ECLGS twice so that businesses could fulfil their short-term liabilities and get by those trying times.  MSMEs can be a beneficiary of this scheme until 31 March 2021 or on reaching the predetermined threshold, whichever comes first.  Under ECLGS, organisations can avail working capital loans with a repayment tenure of up to 48 months. They are also eligible to opt for a principal moratorium of 12 months. Experts believed that the credit guarantee scheme’s extension for at least one year was essential to encourage financial institutions to provide loans despite a sharp rise in NPAs.  As a result, it became easier for small businesses to raise funds and meet their working capital requirements efficiently.  

• Extension Of Interest Subvention Scheme

Besides the extension of ECLGS, India’s MSME sector was also expecting an extension of the interest subvention scheme. This government initiative allows interest subsidy of 2% p.a. to MSMEs if they avail a new term loan or working capital loan.  Similar to ECLGS, the government had previously extended the Interest Subvention Scheme till 31 March 2021.  Under this scheme, companies can obtain loans of up to Rs. 1 crore. The Indian Chamber of Commerce suggested that the government increase interest subvention from 2% to anywhere between 3% - 4% and extend loans up to Rs. 3 crore to benefit more MSMEs. Although many individuals, including the business owners belonging to the MSME sector, were expecting such reforms, no such announcements were made during the presentation of Union Budget 2021.  Nevertheless, the government made other announcements concerning India’s MSME sector to accelerate its revival.

Key Announcements About MSMEs From Budget 2021  

The Finance Minister made the following announcements about the MSME segment in India:

• Total Allocation

Nirmala Sitharaman, in her third budget speech, announced an allocation of Rs. 15,700 crore for the micro, small, and medium enterprises. This sizable allocation, which is double previous year’s, will be utilised to fund vital schemes like the Emergency Credit Link Guarantee Scheme and Interest Subvention Scheme. 

• Reduction Of Customs Duty 

Following the announcements made in Budget 2021, customs duty will be levied at a uniform rate of 7.5% on semis, flat, and long products manufactured using alloy, non-alloy, or stainless steel.  This measure particularly assists the MSMEs, significantly affected due to the rise in iron and steel prices. In addition to this, the Finance Minister proposed customs duty exemption on steel scrap till the end of FY 21-22.  Furthermore, she announced an increase in import duty by 5% on plastic builder wares and steel screws to boost small and medium-scale businesses. 

• Withdrawal Of Import Exemptions

The Finance Minister announced the withdrawal of exemptions related to import duty on specific types of leather to safeguard local manufacturers’ interest and promote the sales of domestically produced goods.

• Establishment Of Mega Textile Parks

India’s textile industry is one of the largest worldwide. Aside from providing employment opportunities, it plays a vital role in the overall development of the economy.  However, since the past few years, this sector has been facing tough competition from Vietnam and Bangladesh, which managed to capture the export market. The Finance Minister proposed that besides the Product-linked Incentive (PLI) initiative, a new scheme will be launched to establish seven mega textile parks within three years.   These textile parks would feature modern technology that would ensure a quick turnaround time to prevent losses caused by logistics.  This reform will undoubtedly boost employment and make India’s textile industry much more competitive, globally.  Besides these measures, Budget 2021 included One Person Company amendments, privatisation of ports, and tax holiday extension.  Although the MSME sector’s expectations were unmet, these proposals have been designed keeping in mind the best interests of small and medium enterprises. 

Bottom Line:

The pandemic-induced lockdown impacted the MSME sector severely, stumping growth and employment generation. The introduction of ECLGS and Interest Subvention Scheme in the interim budget of 2020 played a key role in its revival, and market players were expecting an extension in the Budget 2021. Although those expectations remained unfulfilled, a sizable allocation to the MSME sector and measures like custom duty reduction, import exemption withdrawal is likely to foster growth in the domestic market.