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Union Budget 2025: What to Expect for MSME Sector

Synopsis:

India's 63 million MSMEs, vital to the economy and employing millions, await the Union Budget 2025 with expectations of reforms to address their challenges. The blog explores the sector's hopes for improved financing, simplified GST, and women-centric incentives. With the right support, MSMEs can power India’s growth toward a $5 trillion economy.


Union Budget 2025 is set to be announced on February 1st, 2025. As Finance Minister Nirmala Sitharaman prepares her eighth budget, different sectors are sharing their hopes for key reforms and investments, and so are the MSMEs. It is estimated that in the financial year 2022, the Micro, Small and Medium Enterprises in the country contributed almost 35% to the total manufacturing output. That’s not all. In the financial year 2024, MSME-specific products made up almost 45% of the country's total exports.

While the numbers seem promising, there is no denying that MSMEs in India face significant challenges. Factors like low productivity, corruption, and poor working conditions affect their growth and profitability. These struggles negatively impact the overall economy.

A prosperous MSME sector has the ability to create significant employment at the grassroots level. Budget 25 can play a significant role in enhancing India's growth by supporting new technology and small businesses and developing more retail and digital infrastructure. Continue reading for some views on how these changes can drive progress.

Key Expectations for the MSME Sector

By delivering essential goods and services, supporting larger companies as suppliers, and generating significant employment, MSMEs have consistently been powerful drivers of economic growth and social progress around the world. MSME in India represents over 63 million enterprises, and employs over 10 million people. Contributing to almost 30% of the economy MSME are rightly called the backbone of the economy. 

It has been reported that it is only 16% of SMEs receive timely financing. This creates a massive credit gap of Rs.20 trillion. To add to it, there are almost 86% of manufacturing units that remain unregistered. This further restricts their access to any montatry help. With over 2.18 lakh pending payment instances on the Samadhan portal, it's clear that severe enforcement measures are urgently needed.

Expected Budget Allocation

The growth of MSMEs is often hindered by various system challenges. Listed below are some of the key expectations that the MSME sector has from the FM in the upcoming budget.

  • Expectations from Budget 2025: Ease lending criteria

To improve capital access for underserved MSMEs, public sector banks should ease co-lending criteria for NBFCs by including those rated BBB. This would enable innovative NBFCs and fintechs, currently excluded due to partnerships being limited to A-rated NBFCs, to play a more active role.

  • Expectations from Budget 2025: GST to be Rationalised 

The current GST system is unclear and often creates challenges for most MSMEs. According to experts, simplifying GST to shift liability to buyers could be a game changer for MSMEs. Lowering GST rates for budding MSMEs could also attract more entrepreneurs and boost sales.

  • Expectations from Budget 2025: More Incentives for Women 

Women led MSMEs are a crucial aspect of the entire setup. In the financial year 2021-22, an increase of 21.8 million was reported. Despite the surge, stringent collateral mandates, lack of expertise and regulatory obligations are some challenges women face. While credit guarantee scheme exists, they require an expansion to meet the needs of the growing MSME sector and align with India’s growing priorities.

MSME Sector Challenges to Address in Budget 2025

Budget 2024 had several proposals aimed at supporting the crucial MSME sector. Uneven implementation has only added to its troubles. Despite government measures, many businesses are still grappling with a financial crunch.

The economic growth rate is projected to be 6.4% this financial year, down from 8.2% last year. The MSME sector is likely to be a major priority for Finance Minister Nirmala Sitharaman in the upcoming Union Budget.

  • Limited liquidity

Expanding MSME credit aligns with the government’s goals, but liquidity for NBFCs catering to this sector remains limited. 

  • Payments from large corporations and government entities are often delayed, leading to cash flow issues for MSMEs.

  • MSMEs often struggle to secure timely and affordable loans due to stringent lending criteria, lack of collateral, and lengthy approval processes.

  • Despite government measures, liquidity support remains inadequate, especially for smaller enterprises. 

Solutions like guarantee schemes or a dedicated refinancing institution could make a big difference. To achieve the target of tripling MSME financing, ensuring sufficient liquidity support for NBFCs is essential. Simplifying loan application processes, reducing paperwork and bureaucracy and providing educational resources for financial literacy can work in favour of MSMEs.

To improve capital access for underserved MSMEs, public sector banks should ease co-lending criteria for NBFCs by including those rated BBB. This would enable innovative NBFCs and fintechs, currently excluded due to partnerships being limited to A-rated NBFCs, to play a more active role.

  • Regulatory issues

Complex regulations and compliance requirements increase operational costs and administrative efforts for MSMEs. In the past several regulatory issues have been identified, including challenges related to tax compliance and changes in labour laws. These have further had a significant cost for the MSME sector.In the past few years, labour reforms have been introduced these reforms failed to deliver meaningful improvements for MSMEs.

A single regulatory body or point of contact can reduce the complexity in regulatory matters. A simple yet comprehensive compliance framework with a user-frienfly platform can support businesses.

  • Low on productivity

MSMEs may not always be highly productive. While they might excel in cost efficiency and the ability to produce large volumes at low costs, their small-scale production with slim profit margins often puts them at a disadvantage. This is particularly evident when comparing them to larger businesses with higher productivity levels.

Closing the skills gap is key to increasing productivity. The government did announce in Budget 2024, the setting up of skill centers in MSME areas to focus on specific industries. The government should also offer programs to help MSMEs use new technologies.

Industry Expectations to Overcome Hurdles

An investment infrastructure, that indludes dedicated SME industrial zones and proposed development funds can boost the sector’s development and growth. Yet in Budget 2025, the government must balance its policies to promote growth without burdening the taxpayers. Rationalising the income tax structure and increasing tax deduction limits could enhance disposable income and stimulate consumption which can ensure growth for MSME. 

In Conclusion

India’s MSME hold the key to realising its ambition of a $5 trillion economy only with the right reforms and reducing compliance burden. This vibrant sector can empower the nations. next wave of growth by fostering innovationand self-reliance.

MSMEs also play a crucial role in economic development by creating jobs, connecting with global value chains, and driving local growth. Their flexibility and versatility have enabled them to succeed in diverse areas, from traditional crafts to advanced technology.

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

What are the top expectations for MSME Sector in Budget 2025?

Answer Field

MSMEs are hopeful that the upcoming Budget will bring easier GST rules, support for e-commerce exports, and help them go green and compete globally.

How can the Budget benefit the MSME Sector?

Answer Field

Dedicated SME industrial zones, simplified compliance procedures and financial support can significantly boost the sector's growth and development.

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