India’s policy framework fails the courage and spirit of the entrepreneur

The State must address issues of credit, taxation, regulation, law and skills for small and medium firms

At a time when the government has taken pride in improving India’s rank in the ease of doing business, anecdotal reports continue to suggest that setting up a business, and sustaining it, is a challenge. With Cafe Coffee Day founder, VG Siddhartha’s tragic suicide, the issue has generated renewed attention.

So, what does it take to be a successful Indian entrepreneur? The most important ingredient is a “business-first” structural and policy framework championed by a supportive government.

Small and Medium Enterprises (SMES) form the backbone of economic activity in India. They provide employment to the skilled, and the vast majority of the unskilled and semi-skilled, workforce. But there are challenges galore in being an SME in India, and the policy framework fails the courage and spirit of the entrepreneur.

Credit tops the list of enablers required for the success of an enterprise. There needs to be a distinction in the way credit is allocated to micro, small and medium enterprises (MSMES), as opposed to large ones. The nature and tenure of credit needs are different. SMES also need longer term loans of 24 to 36 months with a six to 12 month interest moratorium (payment deferment). Small businesses are disproportionately impacted by economic or policy shifts. They also tend to have irregular business cycles, as several are at the end of the value chain.

The manner in which credit eligibility gets evaluated for each segment should be different. Evaluation metrics used by banks to provide credit have to be different for SMES and large organisations.

SMES are not as capital intensive — and so the ratio of capital expenditure (capex) to current expenses normally used by banks is not the most appropriate measurement to determine credit eligibility. SMES rely more on manual processes, rather than invest too much in large machines. This allows them to downsize and upsize depending on their orders. Investment in machinery blocks inordinate amount of capital for SMES.

For example, let us assume 24 people can be replaced by a reasonably automated production line costing ₹ 2 crore. In several cyclical businesses, which have quarterly variances from 5% to 40% of annual volume, the monthly interest payout on account of the machinery loan will be a steady ₹ 1.83 lakhs.

The manpower can be reduced to five for

the lean months and increased to 30 in the peak demand months. The total wage bill would be higher than the annual interest cost. But this is a deliberate survival strategy to manage fund flow in lean months, and to not get stranded with a white elephant (machinery) in case of a sudden downturn or unforeseen economic/policy change. So what really constitutes the capex here? The manpower or the machinery? Working capital requirement is actually larger than capex in SMES, but working capital is not funded.

The rate of credit is way too high to allow businesses to succeed. Businesses with longer gestation, or those having a greater social impact, need softer terms.

The second challenge comes from a fluid Goods and Services Tax (GST ) regime. Everchanging rates, interpretations, submissions, sometimes with retrospective effect, alter the entire cost structure, so much so that it can even make the business suddenly unviable. Continuity of policies is absolutely a must to allow mere survival of businesses. Even a tiny change in government policy, ostensibly targeted at a particular sector, has a domino effect on all upstream and downstream suppliers and customers.

The third challenge is in the sphere of regulation. SMES, by design and definition, are neither staffed with the best of talent, nor do they work with a lot of spare manpower. The MSME ministry could help with an updated ready reckoner of all possible registrations and statutory compliances required at both the central and the state level. The various government websites need to be updated with real time notifications, and most need to be redesigned to be user-friendly.

The multitude of statutory compliances such as PF, ESI, MCA, GST, other licenses, with ever-changing guidelines take up time and resources. Several newer laws are not spelt out clearly, and allow for grey interpretations and difficulties. Needless to say, every new form to be submitted means a new payment to the company secretary.

The fourth challenge is in the realm of law. In case companies run into legal issues, there should be very quick redressal with a time-bound roadmap for closure. The regular antics of courtcraft, which can cause an unnecessary number of hearings, is a drain on national resources and can potentially shut down businesses. Routine matters of design, copyright, and Intellectual Property Rights should be disposed by the courts in less than three months so that the enterprises can get on with their businesses.

And finally, there is the challenge of skills. The pool of skilled and semi-skilled talent available for hire is fairly impoverished. This paradox — of a large young demographic looking for jobs, yet a fraction of them equipped for the jobs on offer — has been a feature of the economic landscape. There is an immediate need to train the youth with employable skills.

Unless these issues of credit, taxation, regulation, law and skills are sorted out, Indian entrepreneurs will continue to struggle. Siddhartha’s tragic death is a wake up call to the government.

CONTINUITY OF POLICIES IS A MUST TO ALLOW THE MERE SURVIVAL OF BUSINESSES. EVEN A TINY CHANGE IN POLICY, OSTENSIBLY TARGETED AT A PARTICULAR SECTOR, HAS A DOMINO EFFECT ON ALL SUPPLIERS AND CUSTOMERS