CONTENTS
- A Message of Fiscal Stability, Growth Continuity
- Income Tax Amendment Promises Relief for MSMEs
A Message of Fiscal Stability, Growth Continuity
Context:
The FY25 Union Budget, unveiled by the new administration, emphasizes a steadfast commitment to fiscal stability and sustained growth while introducing a sharper focus on inclusive growth in India. Despite an impressive 8.2% GDP growth in FY24, this growth was characterized by a K-shaped pattern, where high demand for luxury items contrasted with stagnant wages and sluggish sales of basic consumer goods, along with persistent food inflation affecting lower-income groups.
Relevance:
GS3-
- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment
- Inclusive Growth and issues arising from it
- Government Budgeting
Mains Question:
The strong message from the Union Budget is about giving growth in India a more inclusive character. Comment. (10 Marks, 150 Words).
The FY25 Budget:
- The fiscal deficit at 5.6% of GDP in FY24, although elevated compared to pre-COVID-19 levels, provided essential growth momentum through capital expenditure as private investments remained subdued.
- In response, the FY25 Budget implements various measures to strengthen weaker economic segments by enhancing job quality, boosting agriculture, and integrating micro, small, and medium enterprises (MSMEs) into India’s manufacturing revival. These efforts aim to lay the groundwork for a developed India by 2047.
Agriculture Sector:
- Agriculture remains a top priority, with initiatives promoting self-sufficiency in pulses and oilseeds, emphasizing agricultural research in the context of climate change, establishing large-scale vegetable production clusters, and developing Digital Public Infrastructure (DPI) for comprehensive coverage of farmers and their lands.
- A robust agricultural sector will enable the government to fulfill its foodgrain distribution commitments under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), now extended for five more years.
On Employment Generation:
- The Budget places a strong emphasis on creating jobs, particularly for the youth, within the formal workforce.
- A new scheme offering incentives to both employers and first-time employees has been announced with an allocation of ₹10,000 crore through the Ministry of Labour.
- Additional schemes promoting internships, with a budget of ₹2,000 crore, and initiatives for youth skill development in collaboration with state governments and industry, are also planned.
- This aligns with the tripartite agreement (between the Centre, States, and private sector) suggested by the Economic Survey before the FY25 Union Budget to meet the growing aspirations of Indian youth.
On Housing:
- The budget for housing saw a significant increase. The government allocated 37% more funds for the urban Pradhan Mantri Awas Yojana (PMAY) in FY25 compared to FY24.
- However, this is overshadowed by a 70% increase in funding for the rural version of the scheme. Providing housing for all remains a key goal for the government, which is now launching version 2.0 of its initiative.
The PLI Scheme:
- The PLI Scheme received a substantial 75% increase in the FY25 Budget, primarily due to a higher allocation for the auto sector.
- This was accompanied by adjustments to sectoral customs duties to support domestic manufacturing and enhance local value addition.
- To address financing challenges typically faced by MSMEs, the government promised to facilitate term loans for machinery and equipment purchases without collateral.
- To ensure consistent lending, banks will now be allowed to develop in-house credit assessments, and a government-backed facilitation will continue to extend credit to MSMEs even during difficult times.
- Most of these measures align well with the broader goal of promoting job-led growth in the medium term.
- Notably, the government has managed to maintain fiscal discipline while implementing a wide range of measures to stimulate the economy.
Looking Ahead:
- In comparison to the interim Budget’s fiscal deficit estimate of 5.1% of GDP, the government has reduced the FY25 headline deficit target to 4.9%.
- It maintained the planned 70 basis points consolidation over FY24 as outlined in the interim Budget, facilitating a smoother transition to a 4.6% fiscal deficit to GDP in FY26.
- The commitment to continue consolidating its fiscal position beyond FY26 preserves the trust that the government has built with economic observers over recent years, despite facing pressures from regional partners for new demands.
- While the capital expenditure target remained unchanged at ₹11.1 trillion, the benefits from the Reserve Bank of India’s record high dividend transfer of ₹2.1 trillion earlier this year were allocated between increased welfare spending and reducing the fiscal deficit.
Conclusion:
These measures will benefit India at a time when domestic bonds are beginning to be included in global bond indices. With greater scrutiny of India’s fiscal metrics by international agencies, maintaining fiscal discipline lays the groundwork for a potential sovereign rating upgrade in the future.
Income Tax Amendment Promises Relief for MSMEs
Context:
An amendment to the Income Tax Act, introduced through the Finance Act 2023 and effective from April 1, 2024, prevents businesses from claiming tax deductions for payments made to Micro, Small, and Medium Enterprises (MSMEs) beyond 45 days for goods and services. This change has caused considerable concern.
Relevance:
- GS2- Government Policies and Interventions
- GS3- Mobilization of Resources
Mains Question:
The delayed payment of the dues of small enterprises by large enterprises continues to be a major problem as it results in a shortage of working capital severely impacting their production. Discuss. (15 Marks, 250 Words).
About MSMEs:
- MSMEs are support units involved in the production, manufacturing, and processing of goods, primarily intermediate goods, supplied to larger enterprises.
- These units operate on a smaller scale and are classified as micro, small, or medium enterprises based on investment and turnover thresholds defined in the Micro, Small and Medium Enterprises Development Act, 2006.
- A micro-enterprise is defined as one where investment in plant and machinery or equipment does not exceed ₹10 million, and turnover does not exceed ₹50 million.
- A small enterprise has an investment of less than ₹100 million in plant and machinery, with turnover not exceeding ₹500 million.
- For medium enterprises, the thresholds are ₹200 million for investment and ₹1,000 million for turnover.
- According to the Ministry of Statistics & Programme Implementation, MSMEs contribute about 30% to India’s Gross Domestic Product (GDP) in terms of Gross Value Added (GVA). Their share of manufacturing output in all-India manufacturing is even higher, at around 36%.
Significance of MSMEs:
- The export share of MSME-specific products in India’s total exports has fluctuated between 44% and 50% over the past few years, according to the Directorate General of Commercial Intelligence and Statistics (DGCIS).
- In terms of employment, a report by the McKinsey Global Institute (MGI) indicates that MSMEs in India contribute 62% to total employment.
- When considering the broader informal sector—which includes proprietary household and partnership establishments—the contribution to employment is over 75%, while its share in GDP is nearly 50%.
- Thus, MSMEs play a crucial role in shaping the economic landscape, particularly in fostering inclusive development by enhancing employment and income and reducing income inequalities.
Measures Taken:
- The government has implemented several mitigation measures, including a ₹500,000 crore Emergency Credit Line Guarantee Scheme (ECLGS) for businesses/MSMEs, a ₹50,000 crore equity infusion through the MSME Self-Reliant India Fund, and the exclusion of global tenders for procurements up to ₹200 crores to increase their chances of securing government contracts.
- Other measures include relaxing the threshold for MSME classification, extending non-tax benefits for three years if an MSME’s status changes upward, including retail and wholesale trades as MSMEs, launching the Udyam Assist Platform (UAP) to bring Informal Micro Enterprises (IMEs) under the formal framework to benefit from Priority Sector Lending (PSL), and launching an online portal, “Champions,” for various aspects of e-governance, including grievance redress and support for MSMEs.
Associated Concerns:
- MSMEs have borne the brunt of significant economic decisions made by the government during its first two terms, such as demonetization in 2016, the introduction of the Goods and Services Tax (GST) in 2017, and the devastating impact of the COVID-19 pandemic in 2020.
- While the above initiatives aim to address issues of credit availability, technology infusion, and market support, small enterprises continue to face problems with delayed payments from large enterprises.
- When payments for supplied goods are delayed, it leads to a shortage of working capital, severely affecting their ability to continue production.
- To address this issue, Section 15 of the MSME Development Act 2006 mandated payments to micro and small enterprises within 45 days if there was a written agreement (or 15 days without one).
- In 2019, the Ministry of Corporate Affairs issued the Specified Companies (Furnishing of Information about Payment to Micro and Small Enterprise Suppliers) Order, requiring large firms to file returns every six months, even if there are no outstanding payments to MSMEs beyond 45 days.
- However, industries and businesses have requested the Finance Minister to postpone the implementation of the clause in the IT Act by a year to April 2025.
Conclusion:
Meanwhile, there are reports of large enterprises pressuring small firms by choosing not to buy from MSMEs, opting instead to deal with MSMEs not registered on the Udyam portal (an online system for registering MSMEs launched by the Union MSME ministry) or with non-MSMEs. This practice must be prevented. Section 43B(h) of the IT Act should be given a fair opportunity to succeed.
