SMEs: The fault in our approach: India’s self-reliant push fails to recognize cottage industry as critical constituent – The Economic Times

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Synopsis—The road to self-reliance seems to have bypassed millions of tiny businesses. Warped policies hurt them even more.

For many of us, Mahila Griha Udyog Lijjat Papad, popularly known as Lijjat papad, and Nirma detergent powder have been household names. Now, there is one common thing between the two brands. Both started off as cottage industry brands and yet scripted business successes in their respective turf.

India traditionally has had a vibrant cottage industry. Part of the MSME sector, various unique offerings of the Indian cottage industry always remained popular across India and the world. Industries such as cotton weaving, silk weaving, carpet making, leather industry, handicrafts industries that dominate the cottage industry have remained a hallmark of the Indian economy. But, with the pandemic wreaking havoc across sectors, India’s cottage industry also took a heavy body blow. That the sector remains one of the most unorganised and decentralised in character added to its Covid pains.

To minimise the damage caused due to the pandemic to different sectors, Prime MinisterNarendra Modi, on 12 May 2020, gave a clarion call for Atmanirbhar Bharat (self-reliant India). Stressing that self reliance is the only way to ensure that the 21st Century belongs to India, the PM pitched for a vocal for local mindset. That, in simple words, meant that countrymen need to not only appreciate local produce, but should also be vocal about promoting them. PM Modi announced a Rs 20 lakh crore economic package aimed at making the country self-reliant across key actors. According to the government, the package was aimed to cater to various sectors, including India’s cottage and home industries and small and medium enterprises (SMEs). But over six months later, the country’s cottage industry still finds itself in deep trouble.

Neither the PM’s clarion call nor the mega package has effectively reversed the dwindling fortunes of the Covid-hit cottage industry players. Ask any artisan the biggest issue they face, and the answer would be funding. Unsurprisingly, this one factor has traditionally been the Achilles heel of the cottage industry firms, who now believe the government’s latest help in the form of the Emergency Credit Line Guarantee Schemes (ECLGS) scheme does little to change the status quo.

Cottage Industries vs. Small Scale Industries@2x

Experts blame the very design of the scheme for being its biggest flaw. Instead of being targeted at hard-pressed micro entrepreneurs, the package is targeted at only what they term ‘bankable segment’, they argue. The ECLGS scheme, the biggest fiscal component of the Rs 20-lakh crore self-reliant India mission package, is meant for firms having Rs 25 crore outstanding loan or Rs 100 crore turnover. This criterion makes the entire scheme out of reach for micro and small enterprises that majorly represent the country’s cottage industry.

Also, experts contend that the Atmanirbhar Bharat package wasn’t a relief in any sense, as it technically was just an additional loan facility targeted at those already part of the formal financing chain. For a sector that’s run mainly out of homes by micro entrepreneurs, this criteria came as a setback. With no recorded financial footprints to boast, many cottage industry owners suddenly found staying afloat tricky.

The Government’s Covid-19 relief package does little for the cottage industry.“Unfortunately, whatever the Atmanirbhar Bharat package brought, it’s not touching those artisans because these people were never a part of the institutional financial system,” highlights Animesh Saxena, President of Federation of Indian Micro and Small & Medium Enterprises (FISME). Saxena highlights firms which cannot avail loans under ECLGS were/are either borrowing from nearby NBFCs/ microfinance companies or private lenders. And that option that came with a much higher rate of borrowing.

Liquidity, the critical pain point
Today, the cottage industry is reeling under the economic fallouts of the pandemic and it is important to revive businesses with immediate cash flows and other support mechanisms. According to Kuldip Maity, MD & CEO of Kolkata-based microfinance organisation Village Financial Services (VFS), the major problem facing the cottage and small-scale businesses is the shortage of capital and lack of access to easy finance.

“The larger chunk of these entrepreneurial ventures is from the rural and informal sectors, which are perennially credit starved. These businesses are equal and important stakeholders in the mission of Atmanirbhar Bharat. Unless these firms have easy access to finance for continuity of their business operations, we cannot attain the larger mission,” emphasises Maity.

At present, the key to a revival lies in the availability of funds and comprehensive cross-channel intervention, including NBFCs and microfinance institutions, adds the representative of VFS, which lends extensively to the cottage industries.

Funding continues to be the main problem for tiny firms.As a solution, FISME’s Saxena adds that the government should work out a scheme where these people can be funded through some nodal banks or agencies. Access to institutional finance at an attractive rate is a must today for the cottage industry, he stresses.

Tax trouble
A significant share of Indian cottage industries exists in its hinterlands, where logistics solutions and access to latest sales and marketing tools remain a pain points. With Covid crippling the segment’s supply chain, the online sales route offers some solace to the cottage industry. But here too, artisans are at a disadvantageous position, thanks to the country’s regulatory norms governing its ecommerce landscape.

“When selling online, cottage industry players have to be compulsorily registered with the GST. As a result, many artisans and cottage industry owners cannot reap the benefits of e-commerce platforms. In contrast, offline businesses with an annual turnover of up to Rs 40 lakh are GST exempt,” Saxena highlights, adding that for artisans, getting the GST registration and filing the required returns remains a herculean task.

India is predominantly a rural country, with two-third population living in rural areas. For Many Indian artisans, the GST filing process is so complex that it requires the help of professionals, which comes at a cost to entrepreneurs.

A convoluted GST regime makes selling online almost impossible.The threshold limit of aggregate turnover for exemption from registration and payment of GST for suppliers of goods is Rs 40 lakh (for intra-state supplies only). This is Rs 20 lakh for special category states. However, such exemption is not available to a person making taxable supply of goods or services through electronic commerce operators.

There is another issue. The threshold limit of aggregate turnover for opting for composition scheme is Rs 1.50 crore (Rs 75 lakh for special category states). However, the composition scheme is not available for a person making taxable supply of goods through e-commerce operators. The irony is such a condition is not applicable for restaurant service providers.

Experts argue that provisions related to composition scheme may be treated as violative of Article 14 of Constitution of India because it treats manufacturers and restaurant service providers differently. Article 14 of the Constitution of India reads as under: “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.”

“In the current times, with online channels sales gaining prominence and digitization driving economic growth, it is incumbent upon the Government to re-look at some GST provisions to remove roadblocks and prescribe simplified compliances in order to provide impetus to manufacturers selling online,” says, Harpreet Singh, Partner, KPMG in India.

Organising the unorganised
A typical cottage industry is a low-cost investment. But with a lack of investment comes a reluctance to invest in newer technologies. A significant share of Indian cottage industries exists in its tier 2/3/4 cities, where a lack of proper business training is rampant. Also, in technology adoption, they still are led by an old school of thought. Consequently, their merchandise aren’t able to compete with global peers. Domestically too, such firms remain in a no-win situation.

India’s cottage industry suffers from low technology adoption.“Artisans are still using very primitive tools and technology. Because of ill literacy, they lack knowledge about how a product can be finished better or be made more presentable. So, we should organise training or workshops to these artisans at district industry centers or NSIC centers in every cottage industry cluster (e.g. in Moradabad for brass based industries),” suggests Saxena.

Beyond various inherent issues, a host of macro level aspects also require industry’s urgent attention. According to the Indian Chamber of Commerce (ICC), the core issue facing cottage industry today is lack of demand, which is the issue with the whole Indian economy. Policymakers’ priority should now be to boost aggregate demand in the economy using fiscal and not monetary stimulus, the chamber believes. “Reportedly, 6 million small and cottage industries would be severely impacted during the year. The overall sector’s revenue is projected to shrink by 20%. To survive, many artisans have opted for the 100 days employment scheme under MGNREGA,” highlights the industry body.

Industry experts hold that to mitigate the Covid pain, the e-commerce bandwagon needs to be leveraged and online sales platforms hold the key to cottage industry’s self-reliance. Rajeev Singh, Director General, Indian Chamber of Commerce (ICC) asserts that there is an urgent need to link the cottage industry directly to consumers, using the e-commerce route which can reduce logistical costs and link the producer directly to the consumer.

“The new legislation enabling free sale of agricultural produce beyond mandis needs to be extended to the cottage industry too. E-commerce, properly deployed, can bring benefits not only to cottage Industry but also to the agriculture sector. But it will require supporting investment in rural roads, electrification and broadband. State KVIC departments cannot do this,” says Singh. He further adds banks need to expand Mudra loans more to reduce the interest burden on the rural artisan imposed by the village money lenders. Such a scenario would motivate e-commerce companies like Flipkart, Amazon, Walmart, METRO Cash & Carry to expand their reach beyond urban India to rural India, maintains the ICC official.

The horizon ahead
Cheaper imports, for example, raw material, capital goods, especially from China, have been flooding the domestic market. The trend left no room for domestic players to attain self-reliance. However, inspired by the Atmanirbhar Bharat call, industry players are now upbeat on the roadmap ahead.

Cottage industry will benefit from the localisation push.“This initiative has given a boost to my business. I had to add more machines and hire more employees to meet the demand in the market,” says Arun Kumar, owner of a cottage industry firm, based out of Chikkade Village, Pandavapura in Mandya District in Karnataka.

On the government’s vocal for local push, the entrepreneur who supplies goods to other larger MSMEs in the supply chain, however, flags that the biggest challenge for him today is to source raw material locally. “If the raw materials are not available and we still want to localise, how will we do that?” he asks.

Localisation holds the key to the sector’s self-reliance, that’s the common view held by the industry’s stakeholders. Things won’t change overnight, but if unit owners take a firm view that they will only prefer local supplies, the ecosystem will soon see a radical shift, believe industry representatives.

“Wherever we feel that in the long-term as a nation or as a product we will have a competitive advantage by localising, we should localise. Even if raw materials are unavailable, value addition should happen in India. Innovation and growth can happen only if it impacts grassroots SMEs,” contends Arjun Ranga, Managing Director of Cycle Pure Agarbathies, a firm that was launched as a cottage industry unit, and is India’s biggest incense stick maker today.

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