Editorials/Opinions Analyses for UPSC – 26 June 2021

Contents

1. Higher thresholds for Small and Medium Companies
2. The rural economy can jump-start a revival

Higher thresholds for Small and Medium Companies

Context:

The Corporate Affairs Ministry has expanded the turnover and borrowing thresholds for Small and Medium sized Companies (SMC), allowing a larger number of firms to benefit from reporting exemptions under accounting norms.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy), GS-III: Industry and Infrastructure

Dimensions of the Article:

1. Companies (Accounting Standards) Rules, 2021
2. What are the changes in thresholds for SMCs?
3. Impact of these Changes

Click Here to read more about what are SMCs and their predicament

Companies (Accounting Standards) Rules, 2021

• The Ministry of Corporate Affairs has notified the Companies (Accounting Standards) Rules, 2021 which deals with small and medium companies to revise the turnover and borrowing limits and help in making disclosure requirements less onerous.
• The notification has included the revised definition of MSMEs. Under the revised SMC definition, the turnover limit has been increased from Rs 50 crore to not exceeding Rs 250 crore and with enhanced borrowing limits.
• This is in addition to the requirements that such entities should be unlisted companies, which are not banks, financial institutions, or insurance companies.
• Every company, other than companies on which Indian Accounting Standards as notified under Companies (Indian Accounting Standards) Rules, 2015 are applicable, and its auditor(s) shall comply with the Accounting Standards.

What are the changes in thresholds for SMCs?

• The Corporate Affairs Ministry has increased the turnover threshold for SMCs to Rs 250 crore from Rs 50 crore, and the borrowing threshold to Rs 50 crore from Rs 10 crore.
• SMCs are permitted to avail a number of exemptions under the Company (Accounting Standards) Rules 2021 to reduce the complexity of regulatory filings for smaller firms.
• SMC are completely exempted from having to file cash flow statements and provide a segmental break up of their financial performance in mandatory filings.
• SMCs can also avail partial reporting exemptions in areas including reporting on employee benefits obligations such as pensions.
• SMCs are exempted from having to provide a detailed analysis of benefit obligations to employees, but are still required to provide actuarial assumptions used in valuing the company’s obligations to employees.
• SMCs are also exempted from having to report diluted earnings per share in their filings. Diluted earnings per share reflect the per share earnings of a company assuming that all options to convert other securities into shares are exercised.
• SMCs are also allowed to provide an estimated value in use of assets carried on their balance sheets, and are not required to use present value techniques to arrive at the value in use of assets. The value in use of an asset is the present value of future cash flows arising from the continuous use of an asset and from its disposal at the end of its useful life.
• Any SMC which opts to avail of any of the exemptions available to them under the Companies Accounting Rules is required to disclose those which it has utilised in its mandatory filings.

Impact of these Changes

• Experts have noted that the move would promote ease of doing business for the firms that would now be included under the definition of SMC.
• The increase in borrowing threshold from 10 to 50 crores comes as a huge relief considering the difficulties faced by SMCs during the Covid 19 Pandemic.
• The exemption from reporting diluted earnings per share will allow for some amount of alleviation to the adverse impact that the companies might face due to an abnormal drop in profits that are solely an impact of the unfair conditions during the pandemic.
• The Accounting Standards for SMC, which were notified in December 2006 and amended from time to time, are much simpler as compared to Indian Accounting Standards (Ind AS). These accounting standards involve less complexity in its application, including the number of required disclosures being less onerous. Ind AS standards are applied to larger firms, and are largely similar to International Financial Reporting Standards (IFRS) used in most developed jurisdictions.

-Source: The Hindu

The rural economy can jump-start a revival

Context:

The second wave of the COVID-19 pandemic could be slowly receding with the economy also very gradually getting back to normal. However, the challenge of an economic recovery is far more serious than the health pandemic despite official claims of there being an economic recovery.

Relevance:

GS-III: Indian Economy (Growth and Development of Indian Economy, Government Policies and Interventions, Inclusive Growth), GS-III: Agriculture

Dimensions of the Article:

1. Understanding the Economic Outlook of India
2. Agriculture, a key driver
3. The rural economy can jump-start a revival
4. Special Support needed for Secondary Agriculture

Understanding the Economic Outlook of India

• Recently, the National Statistical Office (NSO) released the estimates of the Indian Gross Domestic Product (GDP) growth for the fiscal year 2020-21 and its estimate of decline in GDP, at 7.3%, was slightly better than expectation, even though this is a gross underestimate of the reality given the methodological issue of underestimation of the economic distress in the unorganised sector.
• But what makes economic recovery challenging is that this decline followed three years of sharp decline in GDP even before the novel coronavirus pandemic hit the country.
• Economic growth had already decelerated to 4% in 2019-20, less than half from the high of 8.3% in 2016-17.
• Since then, the slowdown in the economy has not only made things worse as far as economic recovery is concerned but also come at a huge cost for a majority of households which have lost jobs and incomes.

Agriculture, a key driver

• Despite the lack of fiscal support, an important contributor to the better-than-expected economic performance was the resilience of the rural economy, particularly the agricultural sector.
• While rural areas were the first point of refuge for a majority of migrants who walked back thousands of kilometres from urban metropolitan areas, agriculture was the only major sector (other than electricity, gas, water supply and other utility services) which reported an increase in Gross Value Added (GVA) in 2020-21.
• The agriculture sector not only provided jobs to returning migrants but also sustained the economy in the rural areas.
• The average growth rate in agriculture GVA in the last five years, at 4.8%, is significantly higher than the GVA growth of the economy as a whole, at 3.6%, in the last five years.

Inadequacy in the sector

• Unlike 2020, the Government has not increased the allocation this year for the National Rural Employment Guarantee Scheme (NREGS).
• For the country as a whole, despite an increase in employment demand in NREGS, the person-days generated in May 2021 was only 65% when compared to May 2020.
• While the free food-grain scheme has been extended this year as well, it does not include pulses as was provided in 2020.
• Similarly, there has not been any cash transfer to vulnerable groups, unlike 2020.
• While real wages have continued to decline with the latest estimates of April 2021 showing a decline in rural non-agricultural wages by 0.9% per annum in the last two years, agricultural wages continue to stagnate.

The rural economy can jump-start a revival

According to Dalwai Panel, Secondary agriculture is defined as cottage Industry that (a) utilises agricultural products as raw material or provides various inputs to agriculture (b) deploys locally available skills to produce goods and services; and (c) can be categorised appropriately as MSME.

Philosophy behind Secondary Agriculture- Harnessing Structural transformation in Rural Areas

• The share of non-farm income in rural areas has increased from 25% in 1970s to 70% in 2015, while the share of employment in non-farm has increased from 23% to 35%.
• The rural areas account for 95% of agricultural output, 50% of Manufacturing and 25% of services sector output.
• The share of rural areas in manufacturing output has doubled in sixty years, without an associated increase in share in the workforce.
• Thus, there is the need to strategically promote the right kind of development in manufacturing and services sectors, that will generate employment.
• Thus, there is the need to strategically promote labour-intensive cottage-based manufacturing and services sectors to support Indian Agriculture, boost employment creation and transform rural areas.

Special Support needed for Secondary Agriculture

Secondary agriculture would need to be promoted by providing enterprise level support, which can be undertaken by initial setting up of a Division on Secondary Agriculture & Enterprises in all three Departments of the Ministry of Agriculture and Farmers’ Welfare, and coordinate their efforts through a structured platform.

The following steps can be taken to support secondary agriculture:

• Priority sector status for institutional credit.
• Low-cost skilling and knowledge-based exposure.
• Specialised extension services for enterprises owned by females.
• Priority under rural electrification objectives.
• Fast track procedures to avail benefits under ongoing central sector and centrally supported schemes.
• Geographical Indicator labels to products from village scale secondary production.

-Source: The Hindu