Did you know that the word ‘Budget’ in French means a leather case? Well the bag of goodies from the finance minister this year around was expected to be a more tempered one keeping the upcoming general election in mind. And it didn’t disappoint the purists or the critics either. But the moot point being uncovered in this article is about the impact it made to the MSME sector in general & the policies that would be having an industry segment specific impact on its performance in particular. But before that lets examine the wish list that was placed before the finance minister

Major Pre-budget Recommendations

• To reduce Interest cost burden on SME finance: the current rates of 15% -16% which effectively goes up to 18% in the absence of collateral & bank guarantees are a major impediment for SME’s who face severe liquidity crunch

• Reduction in number of inspections for SSI :SME’s have to go through nearly 40 inspections for various procedural clearances, the old vestiges of the now defunct License & Permit raj can still be seen here, the govt was asked to do something to reduce this litany of inspectors

• Increase R&D support : the govt had been requested to provide SMEs with a lifeline on R&D and technological support to by way of increased coordination & linkages among Educational Institutes & Research bodies towards improving technology adoption, encouraging product innovations, improving skill and productivity parameters to compete effectively in a liberalized environment

• Funding & facilitating Quality adoption as a means to overcome the difficulties faced by SMEs to get expensive quality management systems

• Level playing field with SEZs: by way of extension of the tax holiday under Section 10A/10B to EOU/STP units beyond March 31, 2009.

Budget announcement & its Impact

• Automobile ancillary : MSME’s supplying to car manufacturers (especially small cars) & two wheelers are expected to benefit from the budget since excise duty on small & hybrid cars reduced from 16% to 12% and from 24% to the revised general rate of 14% resp. The excise duty on two& three wheeler has also been reduced from 16% to 12%. Those suppliers who are supplying spare parts to electric car manufacturers are likely to be the major beneficiaries on account of exemption from excise duty.

• Bus Body Building sector : Traditionally has been a MSME sector & this got a boost when excise duty on buses & their chassis reduced from 16 to 12 percent. This is expected to boost demand for the industry but the rise in metal prices especially steel is likely to have an adverse impact on the sector.

• Defense ancillary Units : The defence offset programme & the 10% increase in this budgets allocation to the defence sector is likely to benefit all the MSME who are engaged in this sector.

• Hotel services: MSME engaged in servicing the hotel Industry (hotel equipment, F&B suppliers, staffing) are likely to benefit from the 5 year tax holiday to 2,3 & 4 star hotels established in specified districts having UNESCO declared world heritage sites provided that the functioning should commence during the period April 1 2008 to March 31 2013.

• Information Technology: Small IT companies catering to the rural areas are the beneficiaries of this years Budget on account of the announcement of 1 Lakh broadband internet enabled common services in rural areas and the establishing of state wide area networks (SWAN). The Govt has subsequently announced the extension of tax holiday under the STPI scheme for MSME in IT sector by another year.

• Pharmaceutical Sector: MSME suppliers to the Govt sector in the following sectors ;Drugs (common drugs) , Medical equipment (Syringes, Needles, forceps, Lab equipment) and accessories manufacturers (gloves, Swabs, tinctures, bandages) are likely to be the beneficiaries on account of the 15% increase in Budgetary allocation to Rs.16534 Crores for the health care sector. The increased allocation to National rural Health mission (NRHM) to Rs.12050 crore is also likely to have a positive impact to the sector.

• Health care sector: The fore mentioned MSME sector will also the benefit from the expected boom in private hospitals in Tier 2 & 3 cities on account of the Govt’s announcement to grant 5 year tax holiday for Hospitals in these cities. A reduction in excise duty from 16% to 8% will also have a positive impact. R&D equipment mfgrs & suppliers in the MSME sector are likely to benefit from the 125% weighted deduction on amounts spent on R&D for the health care sector.

• Metals : MSME engaged in steel melting scrap & aluminium scrap are the only beneficiaries on account of the removal in excise duty for the above mentioned scrap melting activities.

• Engineering Goods: Small & medium Sports manufacturing units in Punjab & Delhi region can now expect reduction in the prices of sports manufacturing machinery due to the reduction in customs duty on specified machinery from 7.5% to 5%.

• Textiles: Following policies are likely to have a positive impact on the MSME sector in this Industry which is already reeling by the adverse impact of the appreciating rupee

• Allocation for the Technology up gradation fund (TUF) raised from 911 crore to Rs.1090 crore.
• Allocation towards the development of the Handloom sector increased to 340 crore
• National calamity contingent duty (NCCD) on 1% on polyester filament abolished
• The ‘SME Clustering’ initiatives in the textile sector is likely to be the beneficiary of the following announcement n this years budget.
• Setting up of 6 mega clusters proposed with an allocation of 100 crores, Varanasi & Sibsagar for handlooms, Bhiwandi & Erodr for power looms, Narasapur & Moradabad for handicrafts
• 450 Crore scheme for Integrated Textile parks (SITP)

• Capital Markets : The Budget did not bring any cheer to the small & medium brokerage houses that were already reeling with the adverse fallout of the stock market crash,
• Tax rate on short term capital gains increased from 10 to 15%
• Commodity transaction tax (CTT) on commodity based futures & options introduced.

• Banking & Finance: In the 2008 Budget, the finance minister has announced that SIDBI will reduce the guarantee fee for loans to the MSME sector to 1% from the prevailing 1.5% and the annual service fee to 0.5% from the earlier 0.75%. Fund outlay for the sector has also been increased to Rs 1,854 crore (budget estimate) for fiscal 2009 against Rs 1,644 crore (revised estimate) for the current fiscal. This is likely to have a positive impact on the credit pipeline for MSME sector.