It’s time to focus on ease of doing ‘small’ business – The Economic Times

Clipped from: https://economictimes.indiatimes.com/small-biz/sme-sector/its-time-to-focus-on-ease-of-doing-small-business/articleshow/84287980.cmsSynopsis

Systemic bottlenecks and red tape, lack of affordable credit, inefficient supply chains and weak access to markets have stymied the MSME sector for decades

For over 110 million people in India involved in the MSME sector, the last 12 months have been a veritable nightmare. The pandemic-induced disruption in demand, credit availability and labour supply has been a pincer movement that has devastated the financial health of many MSMEs. Surveys estimate that 82% of MSMEs were negatively impacted by the first wave of the pandemic, and 25-40% of them could shut shop. The second wave will probably make these numbers worse.

But the problems of India’s MSMEs predate the pandemic. Systemic bottlenecks and red tape, lack of affordable credit, inefficient supply chains and weak access to markets have stymied the sector for decades. The current crisis has shined a much-needed spotlight on these issues. And so we believe it is opportune to revisit solutions to transform the business environment for India’s MSMEs and present some concrete proposals.

1. Re-think MSME credit: Perhaps the single biggest challenge to the MSME sector is the limited availability of formal credit. The World Bank had estimated that there is a Rs 16.6 lakh crore credit gap . The pandemic has exacerbated this situation as risk aversion has taken hold and caused a flight of credit away from micro-enterprises which are perceived to be riskier.

While a lot is being done to address these issues, there are two new ideas that hold promise.

First, double down on MSME focused credit guarantees. Credit guarantees can play an important role in channelising credit to MSMEs by mitigating some of the perceived risks in lending to this segment. While the government’s Emergency Credit Line Guarantee Scheme (ECLGS) programme has infused much needed guarantee capital of Rs 3 lakh crore in the last year, more can be done to help Non-Banking Finance Companies (NBFCs) in particular, who are the principal credit providers to the MSME sector. Credit guarantee schemes need to be extended to wholesale lending to ensure better credit transmission. We believe it is timely to think about a private sector led credit guarantee company model that can fill critical gaps by focusing on wholesale lending by NBFCs and deploying efficient pay-out processes.

Second, introduce new MSME focused financial instruments that respond to the lived reality of MSMEs. One example is a ‘returnable grant’, a hybrid financial instrument that aims to leverage the best of a grant and a loan, where the borrowing enterprise repays the principal amount as and when she has achieved some intended milestones of financial recovery. This type of instrument is particularly useful during external shocks such as the pandemic and tends to be at least six times more capital efficient than a grant by providing a revolving pool of capital. Though in its early days, the recently launched REVIVE returnable grant program is one example of such an effort.

2. Close the loop on MSME digitisation: From kirana stores taking orders over WhatsApp to digital payments to your fruit-seller, the pandemic has been an inflection point in the digitisation journey of MSMEs. However, many of the critical government touch points for an MSME including compliance filings, applications for government schemes and bank loans processing, still remain largely manual and cumbersome.

This is the moment when governments should enable end-to-end digital platforms to enable smoother compliance and access to government schemes. While many such efforts have been tried, to be effective these need to ‘close the loop’, i.e., digital platforms need to go beyond information sharing and application acceptance, to enable seamless fulfilment of the task. This ‘plumbing’ requires greater cross-government collaboration as it involves multiple departments.

3. Take a systems lens to improve ease of doing (small) business: For a small entrepreneur, operating in the best of times requires regularly overcoming regulatory hurdles. Research by Avantis shows that a typical MSME has to file over 750 compliances every year. The spectre of inspector raj looms daily. A plethora of reforms are needed, but tackling these piecemeal will not create a dent because the challenges faced by MSMEs are uniquely interconnected.

Recognizing the interconnectedness, states must make a paradigm shift to improve the ‘ease of doing (small) business’. This must be anchored on pillars like decriminalization (of minor offences), rationalization of compliances (such as reducing the number of labour registers to be maintained), digitization of processes, and reducing bureaucratic discretion. Such an approach has to be anchored by political and administrative leadership at the highest levels. A recent effort by the Government of Punjab in this direction, led by the Chief Minister and Chief Secretary, provides a promising case study. Based on rapid expert analysis, the Government of Punjab was able to rationalize the number of labour registers to be maintained by an MSME from 60 to 14, decriminalize over 300 low risk offences and reduce discretionary powers of labour inspectors, all in a matter of a few months. More ambitious steps like rationalising and reducing the number of licenses, change of land use and easing access to utility connections is on the anvil. This could be a useful ‘lighthouse model’ other states could learn from.

Much like the cliché, this crisis presents an important opportunity to permanently reshape the ease of doing small business in India. The moment is for us to seize.

The authors work at Omidyar Network India, an investment firm focused on social impact.

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