Employing 40% of country’s workforce, the Indian MSME sector is considered to be the backbone of its economy. Representing a large number of informal players, the nation’s MSME’s base is also the largest after China’s. Despite its importance, the sector is fraught with challenges on multiple fronts.
To understand the issues, ET spoke to the Animesh Saxena, the newly elected president of Federation of Indian Micro Small & Medium Enterprises (FISME), an industry-wide umbrella organisation representing a wide section of MSMEs. Excerpts:
Economic Times (ET): Despite the fact that Indian MSMEs contribute 40% of country’s exports, their existing linkages with the Global Value Chains (GVCs) is an area where domestic players lag behind competitors. What’s your view on enhancing Indian MSMEs’ competitive positioning in this regard?
Animesh Saxena (AS): The Indian MSMEs have been able to link up to Global Value Chains in few sectors only. At the enterprise level, the smaller size of operations of average MSMEs is one reason. But the MSMEs’ competitive positioning is largely shaped by the business environment they operate in. The unpredictability and a high cost of critical services at ports, transport, electricity etc coupled with massive presence of Government all over the economic sphere especially in banking sector tie small businesses down. Reforms are happening, but at snail’s pace amidst fast-changing global environment. For any government that is serious in making Indian industries more competitive, there is a tough agenda of reforms to implement.
ET: It has largely been the unavailability of adequate and timely credit facility, and a high cost of credit that have hurt the MSME sector most. What’s going to be your action plan, post becoming FISME’s president?
AS: Yes, the problem in the banking and the financial sector is acute. It suffers from mismanagement – too many Government-owned banks exist (owing almost 75% of banks) where political interventions are frequent and for whom clients in general, including MSMEs, are not a priority.
We at FISME feel that the urgent attention is needed to review and overhaul the NPA classification and resolution process for MSMEs including rehabilitation of viable sick units. They have suffered immensely due to straight jacketed norms prescribed by RBI during the last couple of years.
In the medium and long term, our focus will be on drawing the attention of bankers on dramatically improving the ‘response time’ using technology. Also, we are advocating creation of large capital-based Commercial bank focusing on MSMEs and revival of viable State Financial Corporations/similar new institutions in the States to fund new MSMEs. In the long term, we need to create greater competition in banking sector and the PSBs should be merged and privatised with a few large banks.
ET: Out of MSME’s traditional pain points, e.g. a high cost of credit, lack of training in latest business know-how or inadequate research and innovations – which do you regard the sector’s biggest impediment, and why?
AS: Businesses grow only if the entire ecosystem is enabling. As we observe in nature, absence of even one element like air or water or sunlight could jeopardize the growth of a plant. Therefore, there is no single silver bullet to address MSMEs’ concerns. Besides credit, the prevailing business environment itself has a huge bearing on the creation and sustenance of enterprises. The Government by its regulatory functions, especially its commercial conduct through its agencies, PSUs, Banks and other parastatals (companies/ organisations owned by govt) shape the business environment. It can dramatically change the commercial practices in the country for good through setting right precedence by paying in time, honouring the commitment and rewarding/encouraging quality producers.
Secondly, Government is a monopoly service provider in many sectors such as Electricity, Railways, and Ports etc. It needs to realise that competitiveness and flexibility are two critical needs of business consumers as they have to operate in a highly competitive and fast changing global environment. The inefficiency and rigidity in critical services can be fatal for MSMEs. There is a need, therefore, to improve focus on the business environment also to make businesses competitive.
ET: The government-initiated (TReDS) Exchange is being touted as a gamechanger for solving MSME’s access to finance issues. However, the concept has not achieved the intended success so far. What could be the reasons playing spoilsport here?
AS: As I said, Government needs to lead by example. Let the PSUs come forward and start using TReDS. FISME genuinely believes TReDS that platform can be a game changer. There has been movement forward in recent months, thanks to relentless pressure by Ministry of MSMEMSME. Hopefully, it shall succeed this time.
ET: NPAs in MSMEs certainly is a growing concern. Even the RBI recently raised a red flag on the spike in NPAs under the government’s scheme to support micro-enterprises in the country – the Pradhan Mantri Mudra Yojana. What corrective measures are the need of the hour?
AS: I agree with you. But, the sudden jump in NPA numbers is also because of change in the classification of NPAs. If an MSME delays loan payment even by a day, the account could be classified as NPA. The current NPA norms are totally absurd and are proving highly counterproductive. Businesses operate in a highly unpredictable environment. Buyers of MSMEs, especially Government and its affiliated agencies, delay payments routinely. But MSMEs have to pay GST, salaries and critical services in time, every month. Banks need to have an understanding of business environment and adopt a pragmatic approach. We have raised these issues before the RBI Governor as well as Chairman of High-powered Committee on MSMEs set-up by RBI in last the few weeks.
ET: How do you see the Make in India campaign, is the campaign really working for the sector these days? What more the current dispensation needs to do to spur domestic manufacturing?
AS: The intention of ‘Make in India’ is very good. But it has also become a victim of some unrealistic and lobby-driven clauses such as very high domestic content requirement and exclusionary pre-qualification criteria which allow only the chosen few to be eligible. Fortunately, officials are accessible and ready to listen. Let’s hope with new Government such issues will be ironed out.
For strengthening manufacturing, besides improving the business environment, we need to focus on technology upgradation on a massive scale in MSME clusters in a mission mode. Individually, these units cannot take up the task of identifying technology gaps in their sectors and then coordinating with machinery suppliers to upgrade.
ET:What are your thoughts on the tax regime of the country? How do you see the export incentives, existing duty structure and tax deductions available (under MEIS/SEIS) to your sector?
AS: On the front of indirect taxes, GST is a game-changing reform for which Modi Government should be lauded. However, what we are realizing now is implementing a highly technology intensive reform was relatively easy. Changing the mindset and processes of tax administration is proving more difficult. In a GST regime backed by a host of connected data-points like Aadhaar, PAN, DIN etc when you know almost everything about a taxpayer and its business, why are you setting revenue targets and unleashing officials to hound them if there is even slight reduction in Tax collection.
On the exports front, being a major exporter myself, I feel our incentive structure lacks innovation. It is true there is not too much room for export incentives under WTO. We need to use them to encourage MSMEs’ linking to Global Value Chains. The most important priority issues for exporters are – seamless refund of taxes on inputs, ease in imports of intermediaries to be used in exports and cost and efficiency in logistics at ports, inland and international haulage. These are critical and Government can do a lot to improve them without spending money.
Secondly, after GST, taxes paid by exporters on goods and services are reimbursed only partially as GST is not levied on all goods and services. The cost of such exclusions creates a cascading effect on an export product.
Finally, uncertainty on the continuance of export promotion schemes needs to be settled. Exporters find it very difficult to enter into forward contracts due to prevailing uncertainty over the fate of MEIS scheme.