The Finance Minister has taken a bold position by increasing the fiscal deficit to 3.5% as against the initial expectation of 3% on the back of substantial increase in expenditure to boost Rural India, Infrastructure and various other growth projects. The key to success will be effective execution of revenue generating initiatives and successful implementation of GST.

Overall the budget has brought cheer to SMEs after the negative sentiment and impact of demonetisation. Rationalisation of tax rates, significant increase in infrastructure investment, focus on rural development, transport & railways will bring into play SMEs involved in these sectors. SMEs are the backbone to larger corporates and institutions who might be executing some of these big bang infrastructure projects. Having said that, SMEs will have to embrace the digital economy to leverage the benefits accruing in the form of improved productivity, credit based on transaction history and exercise greater transparency in their businesses.

Tax sops for SMEs post demonetisation

Demonetisation has had the maximum impact on SMEs given the high cash transactions prevalent in that segment. As a significant sop to them, the Finance Minister has made a tax concession by reducing tax rates from 30% to 25%. This is applicable for those companies with an annual turnover upto Rs 50 crore, which will benefit around 6.5 lakh businesses that account for over 95% of companies in India. Hopefully, this will make SMEs more competitive as compared to their larger counterparts and give some relief from the negative impact of demonetisation.

Limited stimuli for large corporates may impact SMEs

We need to keep in mind that there are several SMEs whose growth is dependent on corporates as they could be suppliers/vendors to them. The budget does not seem to have done much for the large corporates either in terms of stimulating investment or reducing taxes.

Given that private investment declined by 8% in 2016-17, one would have expected significant stimuli for this sector. This is even more relevant given the expected corporate tax reductions in UK and US to stimulate industry and therefore making India relatively unattractive for international firms to invest in as well. We need to keep in mind that the prosperity of SMEs in many instances goes hand-in-hand with large corporates.

Digital infrastructure for SMEs to move into cashless economy

While there has been a substantial increase in budgetary allocation for infrastructure over the past year, it is unclear what investments are going in to building a secure and robust digital infrastructure both in urban and rural areas that is crucial to drive SMEs into a cashless economy from a largely cash driven one. It would have been good to have some more granularity around that given that ‘going digital’ is one of the key planks of the Government

Affordable housing focus to give boost to SMEs

The realty sector comprising of builders, suppliers and others in the construction space affected by demonetisation have also got a boost with a significant allocation of Rs 27000 crore to build one crore houses in the affordable housing segment. This should stimulate demand for SMEs which are part of this industry.

How do we drive growth

The Budget has not outlined any specific initiatives to give impetus to exports given headwinds in the global market. Also the budget has not outlined any clear initiatives around science and technology and manufacturing to boost the ‘Make in India’ initiative.

To drive growth rates of 8-10% our exports need 20% growth, which is highly unlikely given protectionist storms brewing in the US and other Western markets. Likewise there has to be a significant consumption boost with remonetisation and lower interest rates. We assume that with impetus in rural investments and other sectors, there could be buoyancy in consumption later in the year.

However, the key is speed of remonetisation and extent of stimulation by lower interest rates that are already in place. Private investments have reduced by 8% in 2016-17 and therefore higher public investments are crucial. The Finance Minister has increased allocation of capital expenditure by 24% over the previous year with overall expenditure at Rs 21.47 lakh crore. But, we cannot expect any growth in private investments in the coming fiscal year given that no big bang stimulus has been provided.

Risks to Growth

The effects of demonetisation could take longer than the two-quarters of 2017-18 that many economic pundits are predicting, which would severely impact consumption and growth rates. The high probability of escalating oil prices due to geopolitical reasons will impact the economy across the board. This is in sharp contrast to the low oil prices when this Government took office that created a great platform for the economy to take off. And, finally the increasing trade tensions between major economies which is unlikely to subside given Brexit and the new US administration.

There is clearly plenty for SMEs to cheer for in this budget on the back of demonetisation. It is time for this sector to get digital, leverage opportunities and become the driver for growth of the economy.

Source: The Economic Times