Small can be big
India’s industrial policy, despite much positive rhetoric, focuses primarily on large enterprises... When India needs to create 10- 15 million jobs annually, increasing MSME share from eight per cent to 15 per cent by 2020 will be critical.
India harbours tenacious entrepreneurs. Over 46 million micro, small and medium enterprises ( MSMEs), employing over 106 million people, account for 45 per cent of India’s industrial output and over 40 per cent of its exports. Occupying a vast diversity of geographies, they employ India’s entrepreneurial talent while flourishing in sectors with little or too much regulation. And yet, most are perpetually on the verge of closure, haunted by power cuts, unsupportive government policies and rising commodity prices. India’s industrial policy, despite much positive rhetoric, focuses primarily on large enterprises.
Financing remains troublesome. According to the Reserve Bank of India, small and medium- sized enterprises’ ( SME) non productive assets ( NPAs) in 48 listed banks stood at ` 55,000 crore, with practically no buyers for units put up for auction. While the Credit Guarantee Fund was meant to facilitate credit flow without collateral, banks continue to insist on collateral for loans below ` 1 crore. This creates obstacles for MSMEs, who have no financial security, preventing expansion. Delays in payments ( 30- 60 days) by big corporations affect their working capital cycle, while their debt- to- equity ratios hover around 4: 1. Despite significant rhetoric otherwise, the playing field is still treacherous.
When India needs to create 10- 15 million jobs annually, increasing MSME share from eight per cent to 15 per cent by 2020 will be critical. We will need an encouraging incentive- based policy framework that creates supporting infrastructure and prunes regulation, along with providing financing mechanisms and incentives.
While large enterprises utilise media and institutional channels to voice their infrastructure constraints, while SMEs are left bereft of the same. Within new, upcoming industrial corridors, MSMEs should be allocated at least 33 per cent of all land available at discounted rate slabs, helping them start business ventures at affordable rates.
Key stakeholders ( research and development institutes, trade associations, equity investors, banks) could be linked with MSMEs through physical and digital marketplaces. Incubation centers could be developed in local universities to provide mentoring and technology support, along with R& D facilities.
A shared integrated cold chain, similar to Singapore’s government- funded Senoko food hub, could be built for the agri- processing sector. Flatted factory complexes and dormitories might be set up around large cities for MSMEs on public- private participation ( PPP) mode. As recommended by the Prime Minister’s Task Force on MSMEs ( 2010), industrial estates could be notified as separate local bodies and entrusted with municipal functions and taxation, along with infrastructure maintenance.
India’s current procurement policy is neutral towards MSMEs, mandating just 20 per cent of all annual Central government ministry/ department/ public sector undertaking procurements from SMEs. This needs to be more pronounced at the Central and state level. The public procurement policy could be utilised to enlarge markets for MSMEs, with incentives for vendor development utilised to provide support for capital expenditure and technology absorption.
India needs a single comprehensive MSME law covering the gamut of land acquisition, labour management, factory build- up and hiring. A single window should be created to allow entrepreneurs to register their businesses, obtain licenses, conduct annual filing and tax declarations and facilitate intellectual property registrations. Financial policy could be cognisant of the receivables delay that MSMEs face.
MSMEs are continuously created and destroyed as even temporary disruptions can render them sick. MSMEs should be encouraged to convert to limited liability partnerships ( LLPs) by keeping registration and transaction costs low and introducing a graded corporate tax structure for LLPs. Bankruptcy declaration or a sector exit could be made easier as well through a new Insolvency Act replacing the outdated Provincial Insolvency Act ( 1920), allowing for the creation of a specialised judicial body that can appraise viability and up time- bound revival/ closure plans, while allowing for speedy wind up in case the business is determined as non- viable.
Tax policy needs to be refined as well. Micro enterprises should be offered a tax holiday for the first 10 years from both direct and indirect taxes. Small enterprises should be offered a low 10 per cent tax slab for the first five years while medium enterprises to 15 per cent. Foreign companies wanting to set up shop in India in collaboration with MSMEs should be offered five- year tax holidays in those specific sectors.
Most MSMEs face a significant credit gap, with the National Commission on Enterprises estimating 73 per cent for micro enterprises ( average credit offtake ` 1.2 lakh) and 62 per cent for MSMEs ( average credit off take ` 7.2 lakh). They face critical challenges associated with availability of adequate and timely credit, affordable interest rates and collateral requirements and rehabilitation of sick enterprises. Development focused banking has a limited appeal, with banks still averse to giving out loans to SMEs.
Small enterprises should be allowed to have up to 200 investors, with ` 50- 100 crore non- regulated crowd funding. High- net- worth individuals investing in MSMEs could be offered a 10 per cent tax rebate on investments.
A framework should be developed to utilise the MSME Development Fund (` 10,000 crore) and the MSME Technology Upgradation Fund (` 200 crore) along with business facilitation centres that help link all stakeholders ( equity funds, banks, financial institutions, MSMEs) at a regional and district level. Export- oriented firms can be helped by covering marketing expenses, including trade shows, for up to ` 3 lakh.
Banks can be incentivised for investing in innovative firms through appropriate capital adequacy norms, rationalised interest rates and margin requirements and effective monitoring mechanism through the Credit Guarantee Fund Trust for Micro and Small Enterprises. Banks should be mandated to increase SME lending on a 20 per cent year- over- year basis. Any shortfall ( against the 60 per cent lending target to micro enterprises of total lending to MSMEs) should be put into a corpus fund with the Small Industries Development Bank of India, facilitating additional credit flow. All commercial banks should be pushed for a 15 per cent yearover- year growth target in micro enterprise accounts. During periods of sectoral downturn, restructuring of MSME loans should be simplified with higher NPA norms.
India’s MSME policy should be geared towards increasing their contribution to 15 per cent by 2020, covering 50 per cent of overall employment and increasing their share across key public and private industry sectors. This will help fulfil domestic demand, grow exports and attract the holy grail of indigenisation. MSMEs can be our catalyst for growth.