India needs to turn Covid into an opportunity for MSMEs to flourish – The Economic Times

Clipped from: https://economictimes.indiatimes.com/

View: India needs to turn Covid into an opportunity for MSMEs to flourish

Even pre-pandemic and lockdown(s), MSMEs were plagued by low competitiveness. Most small firms were stuck in a vicious cycle of informality and low productivity, resulting in most remaining stunted, with 95% units employing less than five people. On the other hand, firms that start out ‘formal’ are 2-3 times more productive, with better chance of growth. The difficulty is that the costs of formality and compliance are onerous.

Nearly six crore micro, small and medium enterprises (MSMEs) form the backbone of India’s economy, employing about 110 million people, or about 40% of India’s non-farm workforce. MSMEs are also critical to the distribution and supply chains for larger companies, contributing close to a quarter towards India’s services’ GDP and a third towards manufacturing output. This sector has been especially hit by the Covid-19 pandemic.

But even pre-pandemic and lockdown(s), MSMEs were plagued by low competitiveness. Most small firms were stuck in a vicious cycle of informality and low productivity, resulting in most remaining stunted, with 95% units employing less than five people. On the other hand, firms that start out ‘formal’ are 2-3 times more productive, with better chance of growth. The difficulty is that the costs of formality and compliance are onerous.

A typical MSME factory must file for over 23 registrations and licences, ensure 750-plus compliances, and file 120 annual reports. Labour regulations account for a little over 50% of these. With these pre-existing problems and a slowing economy, the impact of Covid-19 is an existential threat to smaller informal firms.

However, this crisis is also an opportunity to quickly address known issues. With the right support, MSMEs can not only survive, but also emerge stronger and more competitive. By its very nature, this sector requires the attention of public policy, as well as the organised large private sector. A strong public-private leadership to drive implementation of well thought-out recommendations is essential. With this in view, the not-for-profit platform, Global Alliance for Mass Entrepreneurship (GAME), convened atask force of policymakers, industrialists and researchers to deliberate on this issue and recommend measures. Its report, ‘Increasing the Dynamism of India’s MSMEs’, provides recommendations for policymakers and industry leaders.

Short-term measures (‘Survive’) focus on financial and regulatory support to keep businesses afloat, restart operations and retain jobs. GoI recently announced a stimulus package to help MSMEs maintain liquidity and access credit. The task force’s recommendations emphasise strong execution of announced packages through state governments and local industry bodies, including clear explanation of scheme details to MSMEs and banks.

Beyond that, it includes monitoring and ensuring that funds are being distributed to small and micro businesses, setting up funds directed at new-to-credit MSMEs, including MSMEs in supply chain financing and bill invoicing (TReDS, Trade Receivables Discounting System) initiatives, and mandating quick disbursement of payables from government and private sector players.

Medium-term reforms (‘Revive’) are directed at increasing ‘ease of doing business’. India is globally 63rd on the ‘ease of doing business’ rankings, owing to high burdens, complex processes and costs of compliance deterring formalisation. Simplifying six key processes for starting and running businesses, rationalising compliance requirements (from about 58,000 compliances across state, central and sectoral requirements), and digitisation of processes by streamlining and removing redundancies across key processes (such as registering property, construction permits), constitute the core of these recommendations.

Criminal liability around compliances for running a business is a major deterrent to formalisation, with nearly 9,000 compliances having penal consequences. Specific measures to decriminalise and evaluate ‘ease of doing business’ at a state level, and publishing annual scorecards to foster improvement are an important part of the midterm plan. Strengthening MSME support network (by rationalising a set of about 3,500 industry bodies), and partnering with local NGOs to ensure addressal of grievances and access to information would also be important.

However, beyond these, to create mass prosperity, to seize the shifts in global supply chains, and to become ‘self-reliant’, India has to create a massive entrepreneurial movement (‘Thrive’) with millions of enterprises across the country, aggressively pursuing local and global opportunities. In the long term, India has to create a pipeline of entrepreneurs by investing in education and incubation. Creating such ecosystems in 300-plus cities by 2030 requires a careful combination of seed (education levels, the degree to which young people have ambition, agency, entrepreneurial mindset), soil (infrastructure, connectivity, access to markets, access to credit and capital) and climate (ease of doing business, local culture).

The United Nations has declared today as MSME Day, to recognise the critical importance of MSMEs in promoting innovation, creativity, decent employment and contribution to sustainable development. The objective of India on this day should be to convert the Covid-19-induced crisis in this sector into an opportunity for mass flourishing. Besides Karnataka, Punjab and Meghalaya, where GAME is partnering with state governments, the endeavour would be to replicate this in more states.

Krishnan is former secretary, GoI, and Venkatesan is former chairman, Microsoft India

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