How Indian MSMEs can overcome current challenges in government policy and finance
Small businesses in India are often one-person shows and often rely on government bodies, banks, and financial institutions to stay running.Vikash Mittersain
The MSME sector in India is one of the country's biggest providers of jobs, right from workers to middle management levels. However, larger companies have sufficient funding to install machinery and automation, which small scale industries do not.
The small scale businesses are mostly one-person shows, with the entrepreneur running their company with some assistants and workers. Even marketing is usually done by the entrepreneur. This owner runs a low-cost operation, as profits derive from low-cost of operations.
Those who understand market dynamics well can run a successful enterprise and grow it. Some move up the value chain - from a few employees to several hundred, moving from small scale to medium. And they rely on support from MSME stakeholders such as government bodies, banks and financial institutions.
MSMEs require a lot of government services and approvals, for which the entrepreneur has to run around. Tax men, factory inspectors, govt clearances, etc, are part of daily life of an entrepreneur. These often act as hindrances.
Further, despite India's economic growth, employment is going down. A task force must be set up by the government to analyse what is causing this drop. This must comprise government officials, economists, and representatives of businesses who face unemployment issues.
There is also a gap between policy and implementation. Budget 2019 will also provide a great opportunity for the government to help this sector.
The GST tool must also be used to reduce the multitude of taxes and procedures which hamper the smooth working of small businesses.
Despite more availability of electricity, digitisation of the payments system (direct benefits), better roads, the government needs to infuse funds into the hands of the common man to facilitate consumer spending.
Taxes are also a factor holding back MSME growth. Any small mistake can invite huge penalties. A small business entrepreneur cannot afford this in terms of cost and time.
Banks and financial institutions
MSME funding from banks has stalled, as decision-making managers are reluctant of loans going bad. These managers are penalised for their mistakes to the extent of losing their jobs. At this stage, the government should consider treating small scale industry loans on par with farm loans, which could entail a one-time waiver of MSME loans and advances, including capital costs of machinery and plant.
This will put working capital back in the hands of the entrepreneur.
Delayed payments from large industries to MSMEs is the next issue faced by small businesses. Further, small manufacturers of engineering components are kept running around in circles for months to get their dues.
Despite these non-payments, these manufacturers have to pay their workers, suppliers, utility bills, and more. This drives the manufacturer to run to banks, and also to loan sharks, who charge high rates of interest.
There must be a law for payments of MSME dues by large industries, which should not be more than 30 days. This would smoothen the working of these units and needs to be applicable to service suppliers and consultants as well.
Internationally, there are financing options such as factoring and bill discounting. These are being present to some extent in India, but there are many complications, which disrupt their systematic working.
The MSME sector must be supported for a few years through special incentives such as 10 percent incentive as reimbursement to MSMEs from the government, based on annual turnover.
Further, the MSME sector is facing a continuous demand in terms of boosting productivity and efficiency. Upcoming entrepreneurs are constrained by the high-cost of setting up business, availability of finance, and increasing complexity of doing business. An MSME exchange is a good beginning to provide equity to this sector.
Industries can also be given grants for R&D to improve quality and develop new products. It gives them an edge over others, helps cut costs of production, and helps build unique positioning.
Further, India should follow the Japanese model of providing funding, technological inputs, and management to small companies involved in exports.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
(Edited by Saheli Sen Gupta)