Fiscal and Monetary Policy – Highlights and Takeaways for MSMEs and Start-ups

By  Alastair Pavrey

The Union Budget and the Monetary Policy have made February an important month for MSMEs, with various policies and measures announced to boost the sector. The Government and RBI together hope to make the sector as a catalyst to the growth of the Indian economy, through key structural reforms.

The Union Budget 2018-19:

Finance Minister Arun Jaitley presented the Union Budget 2018-19 on February 1^st, amidst the backdrop of the current economy recovering from the twin shocks of Demonetization and rollout of the Goods and Services Tax (GST).

The budget provided major benefits to the agriculture and rural economy with a focus on employment and infrastructure creation. The MSME segment also came out as a winner with some important and helpful policies, in addition to steps towards a more inclusive economy.

The government has increased spending which will boost consumption, production, and investments.

The highlight to the budget was the imposition of long term capital gain tax (LTCG), which received a less than welcome response, since it is expected to have a significant impact on investments in the capital markets.

An overview of the Budget from a financial standpoint

A snapshot of the income and expenses from a rupee point of view

Key Highlights of the Budget:

Boost for the Agriculture and Rural Economy ·      Proposals such as fixing MSP (Minimum Support Prices) of unannounced Kharif crops at 1.5 times of production cost. MSP for all crops will be fixed to guarantee a 50% return over the production costs. ·      Tax deductions on profits for a period of 5 years . ·      Higher institutional farm credit (Rs. 11 lakh crores from Rs.8.5 lakh crores).

MSME & Start-ups ·       In a big boost to MSMEs, a reduction in corporate tax rate from existing 30 per cent to 25 per cent, for companies with turnover of up to Rs 250 crores was announced. ·       The Budget for 2018–19 has not only extended tax exemption for start-ups by two years but also changed the definition to widen the ambit beyond technology-related venture. Startups that are incorporated on or after April 1st, 2016 but before April 1st, 2021 will be eligible for this benefit.

Healthcare ·      A National Health Protection Scheme (NHPS) for over 10 crore families that would reach an estimated 50 crore individual beneficiaries — with coverage of up to Rs 5 lakh per family per year. By sheer volume it is one of the largest healthcare schemes globally. ·      The NHPS is expected to be the mother of all insurance schemes in the country with sum assured estimated to touch Rs 50 lakh crore, almost one-third of India’s stock market value, or market capitalization.

Tax ·       10% tax has been introduced on long-term capital gains exceeding Rs 1 lakh, arising from sale of listed equity shares or units of equity-oriented mutual funds. ·       The Union Budget for 2018–19 proposes a hike in customs duty on 46 items including mobile phones, automobiles and components, electronic items, etc. The hiked duty on the wide range of items is estimated to result in revenue flow of about Rs 6,000 crore annually. ·       The government did not make any changes to the existing structure of personal income tax rates for individuals.

Taxation, Funding, Schemes & Subsidies for MSMEs, and Private Equity Funding in Start-ups:

·         The government has extended the limit for corporate tax rate of 25% for companies with turnover of up to Rs. 250 crore (from Rs.50 crores earlier), which would greatly benefit the MSME sector.

·         The government has also mandated large corporates to meet 25% of their funding needs from the bond market. MSMEs and retail borrowers should witness higher credit flow from Banks and NBFCs, as large corporates tap the bond market to meet the 25% target.

·         A sum of Rs. 3,794.00 crore has been provided for giving support (both on debt funding and private equity funding), interest subsidy, and for innovations.

·         MUDRA Yojana, launched in April, 2015 has led to sanction of Rs. 4.6 lakh crore in credit from 10.38 crore MUDRA loans. Government has allocated a further Rs. 3.00 lakh crore under the MUDRA Yojana, for debt funding (of upto Rs. 10.00 Lakh in one unit) to the eligible MSMEs.

·         Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs along with a revamp of the online loan sanctioning facilities which will help in easier availability of business loans.

·         With respect to MSME Loan under Credit Guaratee Scheme (MSME Loan without Collateral Security and Third Party Guarantee), the Fund has been enhanced from Rs. 2,500.00 Crore to Rs. 7,500.00 Crore.

·         The Allocation under ASPIRE (A Scheme for Promotion of Innovation, Rural industry and Entrepreneurship) has been raised from Rs. 50.00 Crore to Rs. 232.00 Crore.

·         The Budget Allocation under SFURTI (Scheme for Fund Regeneration of Traditional Industries) has been increased from Rs. 10.00 Crore to Rs. 125.00 Crore.

Read more about MUDRA, CGTMSE, ASPIRE, SFURTI and other Schemes and Subsidies applicable for MSMEs, visit https://msmemitra.com/

Find out the industry and need specific schemes applicable for your business by visiting https://msmemitra.com/home/schemessubsidies

Highlights of the Monetary Policy and takeaways for MSMEs:

The Reserve Bank of India, as expected by the Industry experts, has kept the repo rate unchanged with a neutral stance for the third time in its sixth bi-monthly monetary policy meet. The Monetary Policy Committee (MPC) highlighted potential inflationary pressures such as crude oil prices, fiscal slippage, and higher minimum support prices (MSPs) on crops to food inflation, as upside risks to inflation.

The major policy implementation towards MSME sector was the measure to provide 180 days of time to GST-registered MSMEs to repay their loans under specific circumstances, with the RBI citing concerns regarding the impact of GST on loan repayment capacity of MSMEs.

Banking sector update:

“Credit growth touched double digits for the first time since September 2016, growing by 10.7% as of January 5, 2018. CRISIL Research expects banking credit to grow 9-10%, supported by improved economic growth, domestic demand, and capital inflow for public sector banks, while deposit growth will grow at 6-7% in fiscal 2018 as the impact of demonetization subsides”

-          CRISIL Research.

 This will be beneficial to the MSME sectors with respect to availability of business loans and credit demand in general, with the banks looking at the MSME sector as a focus sector in their portfolio.

Key rates, after RBI’s sixth monetary policy meet

Note on Inflation:

RBI marginally raised inflation expectations in H2 FY18 from its earlier target of 4.3-4.7% to 4.8%. It expects inflation to inch up to 5.1% in Q4 FY18 from 4.6% in Q3 FY18. The committee cited various reasons such as improvement in global and domestic outlook, an increase in domestic CPI (consumer price index), consecutive increases in core inflation in Nov’17 and Dec’17, surplus liquidity in the markets, etc.

Major Policies for MSMEs:

·         Short-term relief to MSMEs availing credit facilities: GST-registered MSMEs with aggregate exposure of less than Rs. 2.5 crores are to be granted extension of max. 180 days to repay the unpaid dues between Sept’17-Jan’18 to banks and NBFCs, without a downgrade in the asset classification.

A provision of 5% will have to be made by the banks and NBFCs against these exposures. Loans to MSMEs account for about 15% of total advances of the Indian banking system.

This will be positive for MSMEs since most cash flows have been affected post GST and this measure will help in the transition phase for respective entities. However, the RBI mentioned that this measure will be temporary.

·         Priority sector credit caps on MSMEs (services) removed: The existing credit caps of Rs. 5.00 crore per borrower for micro and small enterprises, and Rs. 10 crore per borrower for the classification under priority sector have been removed.

This allowance to the MSME sector will allow a more stable macro environment due to simplification of norms.

Having undergone a financially stressful period following demonitization and the introduction of GST, the reforms and measures pushed by the dual entities of the Government and the RBI earlier this month should provide an appropriate platform for the emergence of easier credit availability to the MSME sector.

This, coupled with the growth of technology-led lending platforms, provides a unique opportunity for the MSME sector to raise funds for expansion of existing business or establishment of a new business, as well as in availing credit facilities for the Working Capital Requirement.

The Fiscal and Monetary policies have laid emphasis on growth of the MSME sector, by introducing favourable policy changes, allocation of additional funds under various schemes and subsidies, and paving the way for availability of more funds (under debt and private equity funding) for MSMEs and Start-ups. Backed by these reforms, there is a realistic potential for the strong growth of MSMEs in the next few years.

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MSMEmitra.com specializes in providing funding solutions (Debt Funding and Private Equity Funding) to businesses of all sizes. Our services include – assessing the actual funding requirement, finding out the best funding option available and in sourcing funds. If you are a business owner, and need our assistance for the funding requirements of your business, connect with us at support@msmemitra.com

Make an informed decision about the best funding options available for your business, and find out how to avail the benefits of the schemes and subsidies applicable for your business, by visiting https://msmemitra.com

Thank you for reading.

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About the Author: Alastair Pavrey is a Finance and Investment professional experienced in transaction-based financial advisory to buy-side and sell-side participants, with a keen interest to understand and contribute to the Indian Private Equity, Venture Capital and SME ecosystem. You can follow Alastair Pavrey on Twitter - @alastairpavrey.

SOURCES: Research Reports published by CARE Ratings, CRISIL, Edelweiss, RBI and other third party publicly available materials.

Disclaimer:

The views expressed in the article are the author’s own. This write-up has been collated from various publicly available materials and secondary data, and MSMEmitra.com cannot guarantee the accuracy of the content. The opinions and expectations arrived at in this article, are based upon the analysis of the Industry by the author and the editorial team at MSMEmitra.com. Readers are requested to check the authenticity of the data at their end, before making any decisions with inherent financial risks.