Beyond Borders: Budget 2024 Looks To Uplift MSME Exports, Financing

The Union Budget 2024-25 has introduced a host of new measures aimed at bolstering the growth of micro, small, and medium enterprises (MSMEs). Among these, the credit guarantee scheme for MSMEs has brought another ray of hope for much-needed financial support.

Finance minister Nirmala Sitharaman also announced plans to establish ecommerce export hubs in a public-private partnership (PPP) model to empower MSMEs and traditional artisans to sell their products in international markets.

These hubs will operate under a seamless regulatory and logistic framework, offering a comprehensive range of trade and export-related services under one roof, significantly enhancing the ease of doing business for small and medium enterprises, the FM said.

Despite MSME-related products accounting for 45.73% of India’s total exports in FY24, industry experts believe that the true potential of this sector remains untapped.

Historically, documentation and cumbersome compliance requirements have imposed substantial costs on small to medium sellers, creating barriers to enter into the ecommerce export market.

Will this change with the Union Budget 2024?

Compliance: Key Challenge For MSME Cross-Border Trade

One of the major challenges that hindered MSMEs selling outside India is the lack of understanding of foreign regulations and their inability to adhere to the intricate compliance standards required for international trade.

According to Tanmay Kumar, chief financial officer of logistics unicorn Shiprocket, managing and delivering orders to global markets affordably is a significant hurdle. Besides this, there are intricacies such as documentation, certifications, customs procedures, and adherence to different countries’ import-export policies.

Plus, international shipping can be expensive, and MSMEs may not have the same negotiating power as larger enterprises to secure better rates and services from logistics providers.

Many MSMEs lack the resources to conduct thorough market research to identify demand trends and potential markets for their products. This limits their ability to strategically position their products in the global marketplace. Dealing with multiple currencies and ensuring secure and timely payments can also be challenging, Kumar added.

The government’s Export Data Processing and Monitoring System (EDPMS) regulates the inflow and outflow of foreign currency, affecting export incentives and compliance.

Simplifying the regulatory maze is one big step towards enabling MSMEs to tap the global opportunity.

Besides compliance, MSMEs face challenges such as limited awareness of demand in different countries and unfamiliarity with international legal requirements, said Nishith Maheshwari, head of digital business loans at NBFC giant InCred.

Many MSMEs lack the resources to conduct thorough market research to identify demand trends and potential markets for their products. This limits their ability to strategically position their products in the global marketplace, added Shiprocket CFO Kumar

In addition, managing and delivering orders to global markets affordably is another significant hurdle. International shipping can be expensive, and MSMEs may not have the same negotiating power as larger enterprises to secure better rates and services from logistics providers, he added.

What Role Will Ecommerce Export Hubs Play?

The ecommerce export hubs, which the government has been working on for some time, could be the answer to many of these problems. It aims to simplify the compliance process and address existing issues through technology.

As per earlier reports, the regulatory framework to enable the setting up and functioning of ecommerce export hubs will be ready by September.

“The ecommerce export hubs should aim to provide market intelligence and customer preference insights, offering market research tools, simplifying documentation and regulatory processes, and facilitating access to trade finance,” Maheshwari said.

Shiprocket’s Kumar echoed the same saying that the hubs can offer access to critical market intelligence, helping MSMEs understand the export potential of their products and identify key demand markets. The insights will enable MSMEs to plan their entry into international markets more effectively.

Many of those we spoke to believe the export hubs can provide integrated financial services, including secure payment gateways and currency management tools, mitigating the risks associated with international transactions.

While the budget did not directly address this point, Shopclues MD Anuraag Gambhir pointed out that there is a significant need for skill-building and capacity-building as well. This would help MSMEs establish an online presence and then expand to international markets using the export hubs.

The Primary Challenge: Access To Capital

While the ecommerce hub will open new opportunities for MSMEs, the basic challenge remains access to capital. For a long time, this has been the main bottleneck for MSMEs. This is down to their limited ability to expand due to a lack of viable financing options or the requirement for collateral and guarantees.

The government’s proposed initiatives for MSMEs with regards to credit can help address this issue. For context, the finance minister announced a credit guarantee scheme for the MSME during her budget speech. The scheme will help in facilitating term loans to MSMEs for the purchase of machinery and equipment without collateral or third-party guarantee.

Moreover, Small Industries Development Bank of India (SIDBI) will open new branches to expand its reach to serve all major MSME clusters within three years and provide direct credit to them.

The new credit guarantee scheme, with a corpus of INR 100 Cr, is expected to enhance capital expenditure within MSMEs, particularly for machinery and equipment financing, Shachindra Nath, founder and managing director, UGRO Capital said.

He added that the value of machinery in many industries, such as CNC printers or plastic moulding machines, is often not well assessed. By providing a credit guarantee, this scheme aims to improve capital expenditure and support MSMEs in acquiring essential equipment.

As per Nath, another important aspect of the new scheme is its potential to improve partnerships between NBFCs and banks. The government has proposed that MSME credit from public sector banks should no longer rely solely on external assessments but also consider their digital footprint.

“This means banks will use data such as GST information and account aggregation data to assess creditworthiness. This shift is expected to encourage collaboration between public sector banks and NBFCs, leveraging digital data for more accurate lending decisions,” he added.

In addition, the term loans to MSMEs for purchase of machinery and equipment without collateral or third-party guarantee can boost the overall manufacturing potential of India as well. In India, the manufacturing sector has faced challenges, particularly with ecommerce companies importing products from China due to gaps in local manufacturing capabilities, as pointed out by Sunil Jhunjhulwala, cofounder of activewear maker Technosport.

Unlike other sectors, manufacturing often relies heavily on debt financing, which typically requires collateral. “The government’s initiative to guarantee manufacturing debt and review collateral requirements is expected to significantly enhance capital availability for the sector. This support could enable more investment in manufacturing, addressing the current reliance on debt and helping to boost domestic production,” he added.

The Indian MSME sector, which contributes approximately 30% to India’s GDP and accounts for nearly 45.73% of the country’s total exports, represents a significant and underutilised economic force. With over 63 mn MSMEs estimated to be operating in India across diverse industries, the sector holds immense potential for driving economic growth, job creation, and innovation.

By addressing fundamental barriers to capital access and simplifying the export process, it remains to be seen whether the Budget 2024’s measures can finally unlock the latent economic power long believed to be held in the MSME sector.