Union Budget 2023: What’s in store for Startups and Small and Medium Enterprises?
Union Budget 2023 is coming soon — it is that time of the year again when businesses and commoners listen keenly to every word of the Finance Minister on how the Govt. will allocate funds and amend rules across various sectors. The Finance Minister will also be cognizant of the low fiscal growth in the last two years due to the pandemic and complications arising from the Russo-Ukraine war.
In November 2022, the Finance Minister met leading economists and stalwarts from across industries to discuss how India can maintain healthy growth in the impending policy-induced global recession. India braved the last two years of the downturn and maintained a healthy growth rate by providing fiscal incentives and relaxation to businesses and, to some extent, to individuals. Before diving deep into the outcome of the discussion, we will take a brief look at Union Budget 2022, which will help us decipher and set expectations for the Union Budget 2023.
Union Budget 2022 Highlights for MSMEs and StartUps
The Union Budget 2022 saw a renewed focus on providing financial support and promoting the growth of SMEs (Small Businesses) and Startups so that they can weather the turbulent times. Read this blog on Union Budget 2022 for more details; however, you can find some key highlights below in a nutshell:
Union Budget 2022 for MSMEs: The Udyam, NCS, e-Shram, and ASEEM portals were interlinked, and the government rolled out various credit guarantee schemes to support MSMEs.
Union Budget 2022 for StartUps: The Govt. prompted selective startups to facilitate ‘Drone Shakti’ and defense R&D for startups, industry, and academia. A fund was raised under the co-investment model to finance agriculture startups and rural enterprises.
Union Budget 2022, Tax Relaxations for StartUps: Eligible startups got tax incentives for three consecutive years. Govt. gave a concessional tax regime of 15% to newly incorporated domestic manufacturing companies. Startups got an extension of customs duty exemption by another year.
The Union Budget showcased the heightened focus of the Govt. on sustaining growth and helping MSMEs brave and sail through the stormy waves of turmoil and uncertainty during the pandemic and war.
As Union Budget 2023 came closer, the Finance Minister, Nirmala Sitharaman, called for industry experts and economists to discuss how the nation can sustain growth during a policy-induced recession. A policy-induced recession is a global recession due to monetary and fiscal policy moves in advanced economies to curb rising inflation and low GDP growth rate due to pandemic risk that pushes the world towards a global recession. Below are some excerpts from the discussion.
Union Budget 2023: Excerpts from the Prebudget discussion between the Finance Minister and Experts
As mentioned at the blog’s beginning, November 2022 saw the Finance Minister’s prebudget meeting with industry leaders and renowned economists of the nation. The critical point of discussion was providing incentives to businesses to sustain financial growth during an economic slowdown. There were eight meetings with 110 invitees.
In these meetings, the experts offered various suggestions and implored the ministry to continue with selective spending and incentivize specific industries to spur growth. They recommended the Govt. to shift focus to the following:
- Create various mechanisms for green certification to help MSMEs
- Schemes for improving domestic supply chains
- Reduction of taxes on electric vehicles (EVs), the introduction of EV policy, and measures to promote India as a hub for green hydrogen,
- Cover unorganized workers under the ESIC scheme.
Based on the above extracts from the meeting and taking deep dive into Union Budget 2022, we can have a fair idea of what to expect from the Union Budget.
What can MSMEs expect from Union Budget 2023?
95% of businesses in India are of micro-scale with limited access to funds given the stringent banking regulations. Simplifying the rules and tax relaxations should be the government’s primary focus. Gradually, improving the ease of doing business can provide a great impetus to growth.
Incorporating the following initiatives in the Union Budget 2023 can be very reassuring for businesses. They are as follows:
Extension of the ECLGS scheme: The Emergency Credit Line Guarantee Scheme (ECLGS) brought much-needed relief to credit-starved MSMEs and enabled them to brave through the economic slowdown during the pandemic, subsequent lockdowns, and supply chain crisis due to lockdown of international borders and war. The ECLGS scheme saw reiterations and extensions from its initial launch in May 2020 and is scheduled to expire in March 2023 unless the government provides an extension.
Expansion of the PLI scheme: The Product-Linked Incentive (PLI) can diversify Indian exports further for the better. The current PLI scheme limits itself to large companies and corporates in specific sectors. While these incentives have boosted domestic manufacturing and created more jobs, Budget 2023 may extend the PLI schemes to MSMEs and future industries to boost exports further.
Offering credit at affordable rates: The Russo-Ukraine war has disrupted supply chains that adversely impacted the export sector. It is one of the main sectors that helped revive India’s economy last year and has experienced 37% year-on-year (YoY) growth. Exporters seek credit at affordable rates that promote increased cross-border trade.
Encourage cash flow-based lending: Launching initiatives such as Account Aggregator (AA) and Open Credit Enablement Network (OCEN) dramatically relieved the MSME sector. We can expect supportive measures in democratizing credit and accelerating financial inclusion from Union Budget 2023.
Restructuring of existing MSME loans: MSMEs suffer from a cash crunch and are now requesting to extend the moratorium of existing loans from one year to three years to repay the loans.
Loans to MSMEs be classified as NPAs after 180 days of non-payment: MSMEs face interruptions in the flow of funds owing to delayed payments from buyers. They are requesting the government to consider loans as Non-Performing Assets (NPAs) only after 180 days of non-payment instead of 90 days.
Boost Manufacturing Sector: Government is more likely to encourage the Make in India campaign by laying the bricks for the right enabling framework to build an entire ecosystem of policymakers — from local policymakers to state and central levels. The sectors the government is looking to focus on are manufacturing, capital goods, defense, sustainability, railways, and public sector banks already seeing new investments. We expect these sectors to continue to be in the spotlight.
What can Startups expect from Union Budget 2023?
Currently, India is home to 108 unicorn startups, making it the third-largest ecosystem in the world, and by 2025 this number is estimated to reach 250. They create millions of job opportunities for the youth and contribute significantly to the national economy. They have high expectations from the 2023 budget, making it easier and more lucrative. Let’s look at some of the major things startups expect from Union Budget 2023.
Simplified compliance
One of the main things that startups expect is an increase in the ease of doing business, at least insofar as government regulations and compliance requirements are concerned. This year, simplifying the tax regime and introducing specific policies that help startups navigate the process of setting up and running a business with minimum hassles are expected.
Tax benefits for early-stage startups
In the early stages, startups need support from the government to come out successfully at the other end of the growth curve. One way this can happen is through the government providing tax benefits to startups working out of shared office spaces, also known as co-working spaces. Programs such as REITs (Real Estate Investment Trusts) can play an important role in this, and if the tax burden on real estate companies is reduced, startups will have to spend less on infrastructure, enabling better cash flow.
Focusing on specific sectors
Industries like Fintech and EdTech have given some of India’s most successful startups in the last couple of years. Now, the startups in these sectors expect the government to form a framework that allows them to interact and collaborate with government agencies. Such collaborations will lead to credibility for the startups, bring them within necessary regulatory structures, and enable them to appeal to a broader customer segment.
Conclusion
Budget 2023 is likely to focus on capital expenditure as a growth driver and give an impetus to manufacturing. The finance minister will try to boost capital expenditure from the current 2.9% GDP to nearly 3.5%. Startups, small businesses, and MSMEs can expect better credit access. Promoting growth and generating more employment may remain the key focus. Tax relaxation and regulations that improve the ease of doing business will likely hold priority.
