DARE - Because Entrepreneurs Do

The Union Budget, announced on February 28, 2011, drew little cheer from the SME sector. Why? DARE explores
The FM announced a Rs5,000 crore outlay for SIDBI, and promised Rs. 3,000 crore to NABARD, potentially benefiting more than 3 lakh handloom weavers. But the measures did not elicit much applause from the SME sector. We spoke to representatives from a cross-section of industries to understand the reasons.

The Sum Given to SIDBI: Insufficient
The MSME sector is one of India’s pillars of socio-economic growth. It contributes 8 % of the country’s GDP, 45% of the manufactured output, and a whopping 40% of our exports. Above all, more than 35 crore people in India earn their livelihood through it. But all it received in the Union Budget was an increase of Rs 1,000 crore through SIDBI.

The sector’s verdict: disappointing
What would really have helped, say industry experts, is an outlay of at least Rs 7,000 crore, considering that the MSME sector’s contribution to the economy is almost at par with that of the agricultural sector. And instead of an increase in the outlay for refinancing, SIDBI should ideally give out funds directly to the smaller units.

Professor R S Deshpande, Director, Institute for Social and Economic Change (ISEC) is among those who feel disappointed and question the entire rationale behind the insufficient increment.

The Outlay for NABARD: How Helpful?
The FM’s announcement of providing Rs. 3,000 crore to NABARD did create a buzz, but did not impress many. Rajen Kumar, Editor SME World, calls it ‘ just another populist measure,’ adding that “Instead of assessing the problems of the weavers, the government has found a puerile way out by calling off their debts. The proposals single out only handloom weavers while the state of affairs elsewhere is hopeless, too. The working of thousands of handloom weavers’ societies known for irregularities should have been reviewed and funds allocated for their better working conditions by setting up rural clusters with assured buy-back facilities. Such a move could work to create more employment opportunities.”

Deshpande is among the many who feel that the real problem is not the size of outlay but the speed of implementation and the efficacy of utilisation. “As is well known, NABARD has many regulations through which the schemes go, and hence the impact of this allocation remains to be seen,” he says.

On the positive side, some sections of the handicraft sector have received remarkable attention. The basic custom duty on bamboo for incense sticks has been reduced from 30 per cent to 10 per cent. This is a big boost for incense stick manufacturers and exporters because it will lower the input cost considerably.

The Increase in MAT: Not Great News for SEZ
The FM has proposed to levy Minimum Alternate Tax (MAT) of 18.5% on the book profits of SEZ developers and units, effective April 2012.

The move, it is widely felt, will hurt investor sentiments. Commerce Ministry Secretary Rahul Khullar has gone on record to say that there is a case for rollback of MAT. “The SEZs are doing extremely well and the MAT will hurt. There is no doubt about it,” he has been quoted as saying.

Add to this the end of the Tax Holiday that the SEZ have enjoyed so far. The Software and Technology Park of India (STPI) schemes in SEZ countries have not been extended. This means that export-oriented units will now have to pay taxes on their profits.”While big companies may not face problems, the lack of STPI benefits will hurt SMEs, which are already struggling,” Som Mittal, President of Nasscom, has been reported as saying.

Other leading officials from India’s top companies, including HP and PriceWaterhouse Coopers have expressed their disappointment at the non-extension of the tax holiday that the IT industry had been enjoying under sections 10 A and 10 B of the Income Tax Act.

To compensate for the lifting of the tax benefits, industry body NASSCOM is thinking up location and innovation based incentives instead of investment based incentives for SMEs.

GST Postponed—Again
So, the GST will now be rolled out in April 2012. Had the $39 billion telecom scam not paralysed parliament since November, the GST, among other reforms, would most likely have been passed in this session. But blame it on the continued legislatory logjam, or the politico-logistical problems of getting every State to agree on the GST, the fact remains this: the wait for a simplified tax structure has now stretched a lot longer.

The SMEs know only too well how urgently the complex system of state and federal levies needs to be overhauled. Industry experts estimate that the GST will have a dramatic impact once it kicks in. Eradicate tax variations between states, and goods will move faster. Businesses and investors will feel the tax burden lighten. GST will cut through red tape and curb corruption, too.

The question is: how much longer will it take?

The Food Processing Industry: Hungry for More
Standing at the forefront of the agricultural sector, the food processing industry has been staring at a cold fact for a long time now: 50,000 to 60,000 tonnes of fruits and vegetables perish before they reach the end user. That’s because there’s not enough cold storage. It’s a colossal waste!

Any hopes that the industry had on this front turned out to be fruitless. That’s the opinion of The Secretary of the All India Food Processors’ Association, DV Malhan. In an interview to DARE, he was both vocal and unequivocal in his opinion of the budget. “The Government has done nothing for the food processing industry,” he says. “There is an increase in excise duty from 4 per cent to 5 per cent on certain products. Moreover, the central government has brought 130 new products under 1 per cent excise duty. Instead of chipping in to help, save perishable products, the government has imposed this 1 per cent excise duty on them!”

Stressing on the issue of post-harvest management, Malhan says, “There should be dedicated cold storage facility, different for fruits and vegetables. We can not keep onions with apples”.

The agricultural sector on the whole is shallow breathing from lack of adequate credit flow. But then, our Grameen Banks, the primary source for farmers to get financing, continue to perform so dismally that increasing the credit flow may not even be the correct—or only—answer.

Base level changes need to be made. Technology up-gradation is a big one. The farmer in the remote village continues to depend on the monsoon for irrigation, and the Budget is silent on this. The FM has announced increased allotment to Rastriya Krishi Vikas Yojana (RKVY) and Accelerated Fodder Development Program, but the success of the schemes will depend on how fast they are implemented.

The Retail Sector: Ignored
What did remain in cold storage—or rather deep freeze—was the opening up of FDI in multi-brand retail. Kumar Raj Gopalan, CEO of the Retail Association of India categorically states that the retail industry had expected much more from the government. “Sure, the tax benefit schemes announced in the Budget are good steps that will increase the consumers’ disposable income,” he says. “But the increased excise duty imposed on garments is a dampener. This will not only affect Retail but the entire garment industry, especially the small scale garment manufacturing units. The increase in excise duty will hike the price, creating a burden on the consumer. We expected measures to curb the inflation in the country, which the budget has not specifically addressed.”

The Leather Industry: Rather Happy
Rafeeque Ahmed Chairman, Council for Leather Exports tells us, “On the whole, the Union Budget 2011-12 has several positive announcements for the leather industry, which will help in enhancing its production and exports and create additional employment opportunities, particularly for the economically weaker sections of the society.” Some of these provisions include:

The establishment of Mega Leather Clusters. Seven such clusters are proposed to be set up during 2011-2012. They are expected to play a crucial role in doubling the exports from the Leather sector and achieving the envisaged export target of US $8.25 billion by 2013-14.

The addition of new inputs to the 3% Duty Free Import Scheme (DFIS), and the scope of some existing inputs has been widened. This will help the leather industry manufacture high quality value added products.

The exemption of enzyme-based preparations for pre-tanning from Basic Excise duty. This will encourage eco-friendly tanning technology.

The provision of an additional Rs. 500 crore to the National Skill Development Corporation (NSDC) will give a fillip to the modernisation of the industry.

Private investors
Private investors, including private equity firms, angel investors play a vital role in the entrepreneurial ecosystem.

Satish Kataria, MD, Springboard Ventures, says, “There have been no announcements in Budget 2011 which would directly impact or promote emergence of angel funds or venture capitalists. Broadly, it seems that the Budget is yet to listen to the needs of the SME and early stage ventures. We still seem to be far from the days when the Indian government, inspired by its US counterparts, would introduce start-up focused initiatives such as ‘Start Up Visa’. The regulators have been working on ‘National Innovation Act’ – which in its current draft does talk about certain progressive fiscal incentives to anyone making investments in early stage companies and innovations. But unfortunately, it is yet to be approved.”

Concerns also remain over rising inflationary pressures (which then impacts the cost of capital and in turn investment appetite); the forthcoming GST Tax regime (which may impact the appetite of international investors seeking to invest in India) and the general apathy towards announcing any fiscal incentives to enhance risk appetite at the early stage ventures.”

Alok Mittal, MD of Canaan Partners agrees that the budget remains silent on these issues. “In particular, we are missing any incentive for angel investors which could be a key trigger to accelerating seed investments.”

The small sops doled out to SMEs in the Budget are grossly inadequate. Are we to conclude that in the FM’s book, small is not beautiful?

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