New Delhi: The government is likely to soon announce a slew of measures, including a differential tax regime, higher interest subsidy and enhanced budgetary support, to help small and medium-sized companies sell products outside India and help narrow the nation’s current account deficit.
In April, the government had constituted an inter-ministerial committee under the chairmanship of finance secretary R.S. Gujral to suggest medium-term measures to boost exports from the micro, small and medium enterprises (MSME) sector. The panel submitted its report in July. In August, a meeting of a committee of secretaries (CoS) was conducted by cabinet secretary Ajit Kumar Seth.
“The CoS accepted most of the recommendations by the Gujral committee. The cabinet secretary has asked each stakeholder to submit a progress report on the recommendations by September end, when another review meeting will be held,” a finance ministry official said on condition of anonymity.
The Gujral committee had recommended a differential corporate tax regime and tax deduction for export turnover for the MSME exporters for a limited period of five years. The finance ministry official said the Reserve Bank of India has also been asked to finalize the modalities on the recommendations of the committee such as to provide additional interest subsidies of 2% for the exporters who repay on a timely basis, providing dollar credit at a cheaper rate, relaxation of RBI’s external commercial borrowings limit for MSME sector and asking banks to aim for at least 40% export credit to MSMEs.
Seth has also asked the MSME ministry to come out with a new definition of MSME by raising the capital investment limit. The Gujral committee had said that the levels of capital investments defining such industries are too low at present and they need to be increased by at least 50%. The current classification marks enterprises with an investment in plant and machinery of up to Rs.25 lakh as micro, up to Rs.5 crore as small and up to Rs.10 crore as medium enterprises.
The steps proposed to be taken are like patchwork, said V.K. Agarwal, president of the Federation of Indian Micro and Small and Medium Enterprises, a lobby group. “The government needs to take a holistic view to boost exports by the MSMEs,” he said. Agarwal said even with around 30% rupee depreciation compared with China in last one-and-a-half years, Indian exporters, especially MSMEs, could not boost exports because they lack marketing efforts overseas.
“We have been suggesting to the government to open offices in Africa and Latin America to help MSMEs promote their products better because we lack resources unlike big corporate,” Agarwal said.
The Gujral committee in its report noted that though its recommendations may increase the budgetary expenditure and reduce tax revenue and add to the strain on fiscal deficit, the steps would help in facing the challenge of rising current account deficit.
At a time when growth is slowing down, giving sops to MSMEs will have a substantial positive impact on employment generation, according to N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, a think tank. “Even with a higher fiscal deficit for productive activities like this will have a higher multiplier on growth than the consumption activities that the government is currently focusing on.”
Finance minister P. Chidambaram has set targets for fiscal deficit at 4.8% of gross domestic product and current account deficit at 3.7%, or $70 billion for the year to 31 March. The government has already exhausted 62.8% of its full-year fiscal deficit target in the first four months (April-July) compared with 51.5% in the same period a year ago. Weak export growth at 1.72% during the April-July period means higher trade deficit and a widening current account gap. Though the MSME sector employs 101 million people, its contribution to India’s GDP is a meagre 8.72%. Higher cost of credit, limited access to equity capital, inability to build brands have meant Indian MSMEs are lagging far behind their peers in other emerging and developed economies.
The sector accounts for around 45% of total manufacturing output and 43% of total exports of the country. MSME exports mainly consists of pearls, precious stones, metals, electrical, electronic equipment, pharmaceutical products, organic chemicals and articles of iron and steel, among others.