Nirmala Sitharaman – Dutch Uncles

Under Stimulus Package, MSME Entitled to Additional 20% Loans

Aakash Sharma — Sat, 03 Jul 2021 10:35:05 +0000

In the second phase of the government-backed stimulus package, the nation’s MSMEs will be granted loans under the credit scheme to survive in the pandemic-hit economy. Industry experts have welcomed the new package but have demanded more than just bank loans; they require direct benefits for increasing cash liquidity in the long term.

One of the features announced is the decision to increase the purview of Emergency Credit Line Guarantee Scheme (ECLGS) to Rs 4.5 lakh crore. The current cap of the ECLGS scheme, announced in May 2020 as part of the Atmanirbhar Bharat Abhiyan package, is Rs 3 lakh crore.

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The stimulus package, worth Rs 6.29 lakh crore in the form of a sovereign guarantee, aims to give relief to the industry's struggling segments from the second wave of the COVID-19 pandemic.

More Credit Guarantee on Loans for MSMEs

The package includes a credit guarantee for bank loans to microfinance institutions (MFIs), lending up to Rs 1.25 lakh to 25 lakhs to small borrowers. According to the latest available data, out of the Rs 3 lakh crore, banks have already sanctioned around Rs 2.7 lakh crore and disbursed around Rs 2.1 lakh crore under the ECLGS scheme.

Under the ECLGS program, MSMEs are entitled to an additional 20% loan backed by a sovereign (state) guarantee. The additional 20% loan limit in the current stimulus package is provided through ECGLS program loans. The credit limit was earlier extended to September 30, 2021. Now, the last date of disbursement under the scheme has been extended to 31 December.

Due to a long-term economic downturn and the financial distress caused by the pandemic, the Indian economy is at its lowest point in decades. The sovereign guarantee on credit loans to MSMEs is going to ease this distress to some extent.

Sovereign Guarantee

Sovereign Guarantee is an assurance in which the government promises to underwrite businesses’ losses in the undertaking as a guarantor due to the disastrous consequences of certain events. The disastrous event, in this case, is the pandemic which has resulted in a sharp drop in companies’ creditworthiness.

What is in the Stimulus Package?

As part of the loan guarantee, banks will provide loans to MFIs at reasonable interest rates and lenders will have easy access to credit to give to MSMEs. The guarantee on loans will be provided to Scheduled Commercial Banks, new (or existing) NBFC-MFIs, or Micro Finance Institutions (MFIs), for on-lending up to Rs 1.25 lakh to approximately 25 lakh small borrowers.

The scheme will have a focus on new lending, not repayment of old loans. All borrowers (including defaulters up to 89 days) will be eligible for the stimulus package’s benefits. Affiliated Member Lending Institutions (MLI) will provide guarantee cover for funding to MFIs/NBFC-MFIs until 31 March 2022 or until guarantees for Rs 7,500 crore are issued, whichever is earlier.

How will the SME and MSME segment benefit from the stimulus package?

Primarily, India’s small business sector, which contributes the most to the nation’s economy, will get a lease on their business life due to increased financial credit and guaranteed low interest-rate security. The new stimulus package will provide the necessary credit to MSMEs and businesses in the lower rung of the economy to perform important functions like covering operating costs to keep the business going.

In addition, loans will be granted to all trusts or registered companies belonging to the MSME category. The application for the ECLGS Scheme, under which 20 per cent of additional loans can be taken, is a seemingly straightforward process. The borrower must register under GST and have an SMA-2 and NPA status. There is no fee for processing the application.

Experts have said that while the recently announced stimulus package is targeted at the areas which are the most affected by the pandemic, it relies more on loans than on direct incentives. Credit guarantee schemes have not guaranteed revival in the past (as recently as 2020) – the current economic downturn is apparent in the low GDP, high inflation and unemployment.

Generating new demand is the most effective way to stimulate the economy, and that requires an increase in consumption. To increase consumption, the government should put money directly in the hands of the people. Sectors need liquid financial support immediately, not credit expansion. It is only when people have cash in hand that they will spend it on commodities, which will increase MSMEs’ business.

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Budget 2021-2022: Funds allocation for Education and Training

Aakash Sharma — Fri, 05 Feb 2021 00:30:04 +0000

A significant take away from the Union Budget 2021 for the Education and Training Sector is that the government has cut the sector’s funding allocation by about 6.13%. Despite the slash, the development of 15,000 Adarsh Vidyalayas, a new central university in Leh, a ‘glue grant’ for sounder synergy among institutions and a unified higher education regulator in the budget 2021-22 were put forth by the Finance Minister Nirmala Sitharaman.

Slash in Rationalisation

The Ministry of Education comptrollers said that the cut is part of a “rationalisation” process based on the COVID-19 exigencies and that people must view the allocation vis-à-vis the revised budget estimates instead. Moreover, the ministry officials highlighted that the cut would not impact higher education institutions- they will now get funding directly from the National Research Foundation instead of the ministry’s budget.

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"In nine cities, we will create formal umbrella structures so that these institutions can have better synergy, while also retaining their internal freedom. A Glue Grant will be arranged for this goal," Finance Minister Nirmala Sitharaman.

Lowering Stats Trend

The Economic Survey 2020-21 reported that spending on education as a percentage of GDP stagnated at 2.8% during 2014-2019 and increased to 3-3.5% in the 2019-21 period. Ideally, 6% of the GDP must be allocated to education, according to experts.

While the Department of School Education has been allocated Rs 54,873 crore, down from Rs 59,845 crore in the previous budget, the Department of Higher Education’s allocation has gone down to Rs 38,350 crore from Rs 39,466 crore. It must be noted that these cuts are being made at a time when educational institutions and consequently, the student community, continue to be deeply troubled by the pandemic’s aftermath.

Additions in Education

Special funding has also been reserved for another significant reform – credit-based education. An Academic Board of Credit will soon be set up for this reform. The government will also establish a new central university in the Union Territory of Ladakh. The Finance Minister announced that Rs 50,000 crore would be designated over the next five years for the National Research Foundation.

Schools will see more vital consolidation and quality upgrade under the Rs 4,684 crore Adarsh Vidyalaya scheme. Under the project, 15,000 schools, identified at block and district levels, will be upgraded to ‘exemplary’ levels. The Finance Minister also recommended setting up 100 new Sainik Schools.

Among the various projects, the Rashtriya Uchtar Shiksha Abhiyaan (RUSA) got a Rs 3,000 crore allocation in BE 2021-22 against Rs 166 crore revised estimate 2020-21. RUSA is a centrally-sponsored scheme that aims to advance institutes’ quality, promote self-autonomy, and ensure quality faculty in all higher educational institutions.

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Union Budget 2021: Fund Allocation for Small Businesses and Startups

Shalmoli Sarkar — Wed, 03 Feb 2021 08:35:02 +0000

Lack of funding, low cash reserves, layoffs, pay cuts, and shutting down operations would be the best terms to describe the year 2020 for small businesses and startups. As India aspires to be a $5 Trillion economy by 2025, its growth trajectory largely depends on how we extend support to startups and small businesses. The MSME and startups need monetary priming for running businesses as they are suffering from massive liquidity, supply crunch, shortage of labour, and non-payment of dues.

Below is the budget allocation for MSME and startups proposed by Finance Minister Nirmala Sitharaman:

Fund Allocation

The Union Budget has allocated Rs 15700 crores to the MSME sector which is double the fund allocated in the previous budget.

To mitigate the stress endured by the startups and MSMEs in the lockdown, the government has announced Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) under Aatmanirbhar Bharat Abhiyan Package. The scheme was valid till October that was extended by Nov 2020, which now has been extended till 21 March 2021.

This year’s budget has given relief to the startups and MSMEs with the relaxation of norms for setting up a business and enabling the ease of doing business.

Incentivizing the OPC

Startups that are run by a single individual known as OPCs (One Person Company) have been granted to do business without any restrictions on paid-up capital and turnover. The new norms have also allowed the conversion of an OPC into any other private company at any time since earlier the conversion to private or the public could happen if only the paid-up share capital surpassed Rs 50 lakhs or its average turnover reached Rs 2 crores. The residency limit for an Indian citizen to set up an OPC has been reduced to 120 days from 182 days, also allowing NRIs to incorporate OPCs in India. It will incentivize investments from NRIs in startups in India.

Extending the Tax Holiday

To boost startup investments, the Government has exempted all the startups from paying taxes along with capital gain exemption till the next financial year i.e., 31st March 2022.

Boosting digital payments

As UPI transactions have witnessed a rise in the pandemic, the Union budget has allocated ₹1,500 crores for a scheme to incentivize digital payments, which will provide financial incentives to startups and MSMEs to promote digital modes of payment.

With the new budget, hope this year’s budget brings a wave of positivity and recovery to the MSME and startup businesses in India.

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Budget 2021: Start-up Gets The Much Needed Boost With Extended Tax Holiday

Aakash Sharma — Tue, 02 Feb 2021 07:49:21 +0000

The Union Budget 2021 has extended eligibility for start-ups to claim tax holiday and capital gains exemption. A business incorporated on or before March 31, 2022, will now be eligible to claim the tax rebates of 100 per cent of its profits. The capital gains exemption given to start-ups is also extended by a year. Earlier, the end date for such claims was March 31, 2021.

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"To incentivise start-ups in the country, I propose to extend the eligibility for claiming tax holiday for start-ups by one more year to March 31, 2022", Finance Minister Nirmala Sitharaman.

The moves come as a relief for start-ups as the country’s start-up ecosystem was direly looking for support from the Union Budget after the COVID-19 pandemic ruined numerous sectors and the economy in 2020.

Tax Subsidy Period Increased

Under the Startup India plan, the government had put forth a tax holiday system, which means a temporary reduction of a tax or tax subsidy for start-ups for seven years. Thus, after April 1, 2016, a start-up set up is eligible for getting 100 per cent tax reduction on its profit for three years in a block of seven years, given that its annual turnover is under the limit of Rs 25 crore in any financial year. The reason for this: to help start-ups meet the working capital requirements during the initial years of operations.

Long-term Capital Gains

As per the rules, any capital gains earned by a start-up will get tax exemption if this gain or a part of it is invested in a fund specified by the central government. This has to be done within six months from the date of transfer of the asset. Under the existing regulations, the maximum amount invested in the long term specified asset is Rs 50 lakh. The tax exemption on such gains is also extended by one year under Budget 2021. This has undoubtedly come as a relief for start-ups.

Anurag Thakur, Minister of State for Finance (left) with Finance Minister Nirmala Sitharaman (right)

Vast Network of Start-ups, Big Opportunities

There are 41,061 govt-recognised start-ups in India. Of this, over 39,000 start-ups make up for 4,70,000 jobs, according to the 2020 Economic Survey. With as many as 38 unicorns, India’s start-up ecosystem is currently the world’s third-biggest. Of the 38 unicorns, 12 were created in 2020 alone.

A much-needed boost is given to the start-up scene by extension of time to pass as a tax holiday start-up. Further, an expansion of the time limit to be eligible for capital gains tax exclusion by investing in new businesses would see more capital being made available by the first-time investors to the start-ups. It is anticipated that the government estimates extending such time limits indefinitely in the following years to have a sustainable “patron” figure for start-ups in it.

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