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The Aspirations of MSMEs

Dr. Abha Wadhwa
Feb 2010

MSMEs play a pivotal role in the overall economic development of India. The Government is working towards providing a suitable policy framework and infrastructure for the MSMEs sector to flourish. The MSME Act 2006 provides the legal framework for recognizing the concept of enterprise, facilitating its development and enhancing its competitiveness.

In view of the PM's MSMEs Task Force recommending a fresh deal for the sector, this year's budget should provide an opportunity to the entrepreneurs to mount a systematic and concerted effort to get set for quality up gradation. Despite the fact that budget is not the only platform for announcing Economic Policy decision, despite also the fact that usually more such policy announcements are made throughout the year than on this particular day alone, this annual event offers an insight into the country's financial health, set the tone for further policy decision and charts out the general roadmap that the development caravan is likely to follow during the year.

Even though the focus of the Government (in terms of budgetary allocation) changes every year, there are some sectors that always fall in the privileged group. The NREGS is clearly perceived by many people, within and outside the Government to have played a stellar role in the re-election of UPA. Even with its limited coverage and concern about inefficient implementation, it offered several millions of people a safety net that did not exist before. Security against complete deprivation is a fundamental component of inclusion and intent of Government to broaden the programme and hopefully make it more efficient is clear from the significantly larger allocation made to it. On the dimension of inclusion viz MSME have not increased significantly over the previous year. A lot of activity in these sectors is of-course, funded by state and local Governments, but it is surprising that the Central Government, which swears by its inclusiveness agenda, have been conservative in its allocation.

Fiscal Discipline

A brief assessment of the aspiration of the MSMEs from the budget proposal is done on the basis of Fiscal Discipline: The RBI (Reserve Bank of India) has set the agenda for tightening liquidity. RBI has indicated that ball is in government court and the Government will have to do something about the fiscal deficit. Even though the fiscal deficit in India is very high, all developed markets have even higher fiscal deficits. The Government has very few options- cut subsidies, cut expenditure or increase taxation. Currently emerging markets are the flavor among foreign investor and within that India is seen as bright spot in terms of Economic growth. As the Economy limps back to growth, thanks to the fiscal stimulus measures, the government is under pressure to ensure that the recent recovery does not falter and also to keep the inflationary pressure in control.

In the upcoming budget, MSMEs expect the Government to give clarity on how it plans to deal with the situation, without upsetting Economic growth. The concern is not so much with the size of the deficit at this point in time, where the contradiction is most obvious but with the absence of an explicit strategy to deal firmly with the problem as the economy recovers and the need for fiscal stimulus reduces. An ambitious disinvestment target is expected to be announced in the budget. MSMEs need to see more articulation of reforms on the tax and expenditure fronts, which will constitute a dynamic plan to reduce the deficit.

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