When money is not worth a penny: SMEs need more than monetary schemes to grow – The Economic Times

Clipped from: https://economictimes.indiatimes.com/small-biz/sme-sector/when-money-is-not-worth-a-penny-smes-need-more-than-monetary-schemes-to-grow/articleshow/89960953.cms

SynopsisThe government has provided a lot of monetary support to small businesses. But stakeholders say it is time to look beyond such programmes to unleash growth.

The government’s credit schemes have been a big help for small businesses. The Emergency Credit Line Guarantee Scheme alone has since 2020 saved 13.5 lakh firms from bankruptcy and some 1.5 crore jobs from vanishing, according to an SBI research report released in January. Why do MSMEs still find themselves in deep waters?

Because the problem is more than just money, experts say. Make no mistake, access to quality credit and smooth cash flow for operational and capital investments are still matters of great concern to small businesses. However, even if these obstacles are taken care of, these firms, particularly the small and micro enterprises, face numerous non-financial barriers in ease of doing business, infrastructural facilities, education and awareness and market linkages. “These factors have constrained the growth of MSMEs,” says Pradeep Multani, President, PHD Chamber.

Experts point out that unless these bottlenecks are eliminated, small businesses would not be able to gather enough steam to push the country’s economic growth into a higher orbit. With an estimated 6.3 crore MSMEs in the country acting as the backbone of the economy, and small businesses constituting the bulk of MSMEs, these issues need to be addressed at the earliest.

The government did take several steps to make MSMEs’ operations comparatively easier, says Multani. India’s rise from 142th position in 2015 to 63rd in 2020 in the World Bank’s Ease of Doing Business Index vindicates these policies. “But we still lag in areas such as enforcing contracts and registering property. There are many other constraints and policy concerns, such as multiple registrations and approvals, higher taxation for proprietary and partnership concerns, cumbersome procedures, complicated labour laws and inadequate infrastructure, among others, that need urgent attention of the government to bring in real ease of doing business for the MSME sector,” he says.

All these diminish the gains made in ease of doing business and by announcing various schemes, claim experts.

Multani cites the example of goods and services tax (GST). Doubling the exemption limit to Rs 40 lakh is a move in the right direction but the need for multiple GST registrations, denial of input tax credits to compliant entities because of vendors’ faults, and cumbersome compliance burdens need to be redressed for smooth business operations, he says. His suggestions include removal of minimum alternate tax and abolition of capital gains tax for MSMEs. “The recent cut in corporate tax rates for domestic companies should be extended to proprietorship, partnership and LLPs also,” he adds.

The tech fairy
Tax cuts are an evergreen demand among industry stakeholders. But there are other issues too that keep the growth of MSMEs stunted. One of the main problems is poor adoption of technology, experts say.



Large sections of the MSME community, which are run under proprietorship, partnership and LLP mode, have not benefited from the recent cut in corporate tax rates.

Small businesses might have the expertise, skills and manpower. But in today’s world, technology plays a decisive role in sustaining and growing operations. “All the main reasons crippling SMEs’ growth are interconnected with technology,” says Animesh Saxena, President, Federation of Indian Micro, Small & Medium Enterprises (FISME).

The past two years have forced several businesses to embrace tech to stay afloat. But not among smaller and micro enterprises. Cost of technology is a deterrent for micro enterprises, explains Jayanth Mutha, Director, Himlite Products. This is true for use of tech in manufacturing as well as use of software and hardware in offices. “The reason for that is that every cost is seen as a part of sales. Basic software products come in the range of Rs 9,000-10,000 which can be around 10% of a micro enterprise’s revenue. They ask why they should give that to a software company.”

Then there are expenses related to hardware, infrastructure upgrade and trained personnel. Software and hardware might also require upgrades every now and then. All these add to the expenses that companies in a certain bracket want to avoid.

There are consistent updates and changes in government policies, too, and this can also be a challenge. “They keep changing the policies and the rules on how to upload the data or the format of the data or some specimen in the data,” says Vinit Sancheti, Partner at Bangalore-based Sancheti Global Inc, which imports spices and other goods. “These changes can be as frequent as 15 days to a month. Even the software people are not able to upgrade instantly. It can be tough and tiresome for small entrepreneurs to keep a software updated with the latest changes.”

The goods and services tax (GST) shares some of the blame for this problem. Before the indirect tax regime was introduced, Sancheti Global used simple billing software and Excel sheets for accounting. But now there are so many factors to be considered to calculate GST that the company has started using software for accounting and inventory management. “Uploading numerous GST forms, then filing the GST returns, and then you have income-tax forms, and then you have to capture all the data in the right format and meet all the compliances,” he adds, listing the pain points.

Unfriendly software
A lot of small businesses embrace technology because they are forced to. The pandemic, for instance, put MSMEs that wanted to survive in a quandary. One person who has a ringside view to how companies have started implementing technology after the pandemic is Tejas Goenka, MD, Tally Solutions. The Bengaluru-based company sells tech products and solutions for small businesses. From bookkeeping to communication tools, he says, MSMEs in India are demanding and looking for more and more software solutions. But the situation is not that easy among micro enterprises. “They are definitely interested in going digital because they know they cannot find customers only through brick-and-mortar establishments. But I don’t think micro enterprises are really open to pay for this. There is a lot more openness for free technology.”



Frequent changes in GST has been a big headache for MSMEs.

Goenka lists understanding these companies as a way to make them more tech friendly. That way products and services can be made more accessible and affordable for them. “We need to understand what margin structures they work with, what kind of customer behaviour is expected.” He does not shy away from stating that some onus also lies with companies like Tally. “There is a lot that I think companies like us need to do to really bring these micro players into the fold of automation. I think it will take some time for micro companies to fully realise the value and it will also take some time for companies like ours to provide that value,” adds the MD of Tally Solutions.

While a more inclusive environment and support system will help here, several companies are unaware that they can approach institutions such as the MSME Development Institutes for guidance. “Many manufacturing entities do not have adequate knowledge about appropriate and innovative technologies that can help them,” says Multani.

The production function needs better technology to improve quality, which is required to expand market share and enter new geographies. The government has to address these issues if it wants MSMEs to be a part of the global value chain, says Saxena. “Unless we improve our technology sector, we cannot compete. That is why we lost to China.”

Finding the right market
Poor digital embrace leads to another problem: weak market linkages. Rajiv Chawla, Chairman, IamSMEofIndia, says without information on the right market linkages, SMEs cannot promote their products. They can’t find the right suppliers either and this eventually pushes them out of the market.

PHD Chambers’ Multani suggests the government set up a system to undertake research and collate information about various domestic and export marketing avenues. MSMEs should then be given information on market research, market size, segmentation, growth rates, trends, buying attitudes, regulatory requirements, product requirements, distribution channels and competitor activity strategy and performance.

A hindrance in providing all this facilitation can be the geographical spread of SMEs. The GeM Portal (an e-commerce portal) for SMEs, trade shows as well as awareness, inter-governmental and export-import programmes disseminate information. But, says Co-founder and CEO of MSMEx Amit Kumar, SMEs based in metros are generally able to learn and be aware of information on their own. The ones in remote areas are unable to do this.



In today’s world, technology plays a decisive role in sustaining and growing operations.

It is time for SMEs all over the country to switch off the “offline mode” and get into an “online mode”. That is the only way information can be spread to all corners and learning can be made a continuous process. “The government should encourage SMEs to get access to online events and participate in these; understand schemes and issues, and also execute operations online as much as possible. That way, the reach will be much faster,” he says.

A way to do it is to specifically earmark additional funds to set up technical and physical infrastructure under certain schemes. The outlay under the schemes now are inadequate to cover these needs of the sector, says V Padmanand, Partner, Grant Thorton. To improve market linkages, he suggests the government support the industry associations to establish raw material banks. Banks can also be directed to include this component under priority sector lending targets, Padmanand says.

Labour management
Other constraints for small businesses are around employment and social security. Though the government has merged multiple labour laws to simplify legislations, a complicated regulatory environment and labour market rigidities continue to limit their growth potential, he claims. “Adequate flexibility should be given to the industry to devise the terms of employment. For example, in the case of Employees’ State Insurance, the government could make it either ESI or medical insurance coverage. Insurance, provident fund and other such norms should be simplified for MSMEs,” he says.

Some compliances are so time consuming that SMEs will have no time to focus on their core operations, or they have to spend money and hire consultants. “It consumes so much time and money,” says Jayanth Mutha, Director, Himlite Products. “Getting a registration done is such a headache. We have 3-4 registrations and renewals pending every month. Are small businesses and entrepreneurs supposed to waste so much of their time on this or run their companies? There has to be a simplified way to put everything up in one place and complete your registrations easily.”

Another problem with labour is that smaller companies are often unable to get skilled workers. They have to hire unskilled workers and train them. But the companies may lose these employees anytime and due to a variety of reasons. Mutha suggests that the government set up multiple training hubs to skill workers for industry.

Experts insists the government has taken a step to target some of the problems that stand in the way of MSMEs’ growth. Padmanand of Grant Thorton points to the Micro and Small Enterprises Cluster Development Programme (MSE-CDP) that aims to enhance the productivity and development of MSMEs in India in the parameters of skill, technology, quality and market linkages, among others. The scheme offers up to 70% of the cost (up to Rs 20 crore) of developing common facilities centres with equipment for critical processes, says the website of the Development Commissioner of MSME. However, the scheme could not develop the clusters on time. According to the MSME Ministry, out of the 68 projects approved for FY21, only 18 were completed during the financial year. Similarly, out of the 74 projects approved for FY20, only 22 were completed. In FY19, 28 projects out of 36 approved were completed.

“Cluster-based financing instruments should be evolved by banks in consultation with industry associations at the cluster level. This will ensure appropriate financing instruments are evolved and the RBI task force’s recommendations on lending to the MSME sector are complied with,” adds Padmanand.

There is no doubt that creating an enabling ecosystem for small businesses has to be a multipronged approach that involves various agencies. The path to a $5-trillion economy can’t be built on monetary support alone.

(Edited by Ram Mohan)

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