MSME Day | With right policies, 2021 can see an MSME boom in India

Sumita Kale

Three years ago, the United Nations declared June 27 as International MSME Day; the resolution was made to recognise the valuable contribution made by small businesses towards sustainable development. The resolution also stressed the importance of encouraging formalisation of a segment that accounts for over 90 percent of all firms globally, around 70 percent of total employment and contribute half of GDP.

The day assumes greater significance in India this year with the economy sharply hit by COVID-19 and small businesses reeling under deep fiscal stress.

The pain of MSMEs in India in normal times has been well documented, the reasons have also been well documented. Eighty-seven percent of firms in India representing 21 percent of total turnover are purely informal. This is because of what is in effect a ‘formalisation tax’ incentivises companies to stay under the radar. Heavy regulatory cholesterol through complex laws and rules and cumbersome paperwork has made us a country of informal, small units, with informal, low-wage jobs.

The government does know this — the Economic Survey 2018-19 made the point that bad policies have led to stunted growth of firms, creating dwarfs, and the latest Economic Survey had a detailed section on effective ease of doing business. Yet, initiatives for change are few and far between.

Take the issue of delayed payments. The single-biggest hurdle that small businesses face is the stress of working capital and the issue of delayed payments has been flagged repeatedly over years, with completely ineffective enforcement of the 45-day rule of payments.

However, even here, the government, which should have led by example, had been dragging its feet on paying out its own dues to the smallest of businesses. It took a virus and 50 days of lockdown for the central government to announce that it will clear its own dues to MSMEs within 45 days. Such lax commitment to action shows up clearly in the World Bank Ease of Doing Business Score — though India rose in rank over the past six years from 142 to 63, when it comes to contract enforcement, we rank 163 out of 190 countries, an increase of just 20 ranks from 186 in 2015.

Much has been said about the high compliance burden that bogs our businesses down. So we find that a small manufacturing firm in which one factory has to file around 10 returns per month, while a mid-sized manufacturing company spread across six different states is regulated by over 5,000 compliances, approximately 100 licenses and registrations — making for an average of two filings a day! The burden on small companies is naturally proportionately larger, as these are typically businesses run by one person at the head.

There are three levels of challenges to overcome: First, the compliance landscape is huge, and involves rules set by the Centre, state and local governments. Second, the complex legal language necessitates expenses on hiring consultants as ‘interpreters’. Third, there is a massive amount of paperwork to be submitted across government departments for filings, licenses, renewals, etc.

A comprehensive relook is necessary to rationalise, simplify and digitise the rules and processes to ease the burden on small companies and release their resources of time and expenses towards operational efficiency and higher productivity. In short, MSMEs must be brought within a compliance architecture that befits the 21st century.

While labour law reforms are long overdue, the knee jerk reaction of some state governments during the lockdown boomeranged badly. While businesses need flexibility, labour needs protection. For this, the Centre and state governments have to recognise that it is not the spirit of the law that businesses resent; it is the endless and mindless paperwork, archaic irrelevant rules accompanied by penal provisions that have led to the inspector raj and corruption defining the current regulatory space. This is what has to change for meaningful ease of doing business.

The proposed National Ease of Doing Business Policy as a draft Cabinet note last year reportedly put the burden squarely on the bureaucrats, asking them to justify the compliance requirements they place on businesses, in terms of actual costs and time spent. This must be on the forefront of government agenda now.

The Finance Minister had said that the stimulus package “shall not be just a financial package, but a reform stimulus, a mindset overhaul, and a thrust in governance.” So this International MSME Day, India should pledge to move away from the policy paradigm that stunts growth. With policies and procedures that incentivise growth, 2021 can be the year MSMEs bloom in India.